ri 


THE    NEW    YORK    STOCK   EXCHANGE. 


THE  WORK 
OF    WALL    STREET 


BY 

SERENO    S.   PRATT 


NEW    YO  RK 
D.     APPLETON     AND     COMPANY 

1903 


COPYRIGHT,  1903 
BY   D.   APPLETON   AND   COMPANY 


Published  January,  1903 


UbMgmt 
Library 


TO 

J.  EDWAED   SIMMONS, 

PRESIDENT   OF   THE   FOURTH   NATIONAL   BANK, 

VICE-PRESIDENT   OF   THE   CHAMBER   OF   COMMERCE, 

FORMERLY    PRESIDENT    OF    THE    NEW    YORK    CLEARING-HOUSE 

ASSOCIATION   AND   OF   THE   NEW   YORK   STOCK   EXCHANGE, 

A    TYPE    OF    ALL    THAT    IS    BEST 
IN  THE   WORK   OF   WALL   STREET, 

THE     AUTHOR     DEDICATES     THIS     BOOK 

AS    A    TOKEN    OF    HIS 
REGARD   AND   ESTEEM. 


1680988 


PREFACE 


MUCH  has  been  written  about  Wall  Street,  and  yet 
much  remains  to  be  written.  It  fills  a  large  space  in  the 
daily  newspapers.  It  has  furnished  plots  for  plays,  inci- 
dents for  novels,  and  has  been  the  theme  of  brilliant  maga- 
zine articles.  A  few  books  have  been  published  about  it. 
Nevertheless  there  exists  a  remarkable  degree  of  ignorance 
regarding  the  work  of  Wall  Street.  Few  indeed  have  any 
clear  comprehension  of  what  the  stock  market  really  is,  and 
why  it  is.  Little  is  known  outside  of  the  financial  district 
of  the  mechanism  of  the  money  market.  The  history  of 
speculation  and  its  effects  on  the  development  of  civiliza- 
tion have  not  been  deeply  studied.  Even  many  Wall  Street 
men,  expert  as  they  are  in  the  actual  operations  of  their 
business,  could  give  only  very  inadequate  explanations  of  the 
great  principles  underlying  it.  The  newspaper  presents  on 
an  inside  page  the  daily  money  article,  consisting  of  long 
tables  of  sales  and  quotations,  introduced  by  a  generally 
careful  and  intelligent  technical  review  of  conditions  and 
movements.  In  its  news  columns,  under  display  head-lines 
of  big  type,  it  at  the  same  time  gives  a  sensational  and 
more  or  less  inaccurate  account  of  the  latest  marvel  pro- 
duced when  the  Aladdins  of  Wall  Street  rub  the  lamp  of 
speculation.  Dramas  and  novels  dealing  with  the  Street 
have  succeeded  only  in  a  partial  degree  in  showing  life-like 
pictures  of  the  play  of  human  emotions  and  ambitions,  the 
hopes  and  fears,  the  achievements  and  the  failures  devel- 


vin  THE  WORK  OF  WALL  STREET 

oped  there.  The  magazine  articles,  though  often  able  and 
instructive,  have  usually  been  written  from  the  controver- 
sial standpoint.  The  books,  such  of  them  as  have  had  any 
serious  aim  beyond  the  presentation  of  advertisements, 
have  been  one-sided  or  restricted  in  their  scope.  One  gives 
reminiscences  of  the  men  and  deals  of  Wall  Street.  An- 
other.  relates  to  the  law  which  protects  and  regulates  its 
operations.  Still  another  consists  of  discussions  of  various 
public  questions  influencing  its  markets.  Others  give  ex- 
cellent accounts  of  the  Stock  Exchange  and  the  Clearing- 
House,  but  do  not  extend  farther  than  the  boundaries  of 
those  institutions.  Glossaries  have  also  been  published  of 
"Wall  Street  terms,  together  with  brief  explanations  of 
stock-market  processes.  But  not  one  book  has  appeared 
undertaking  to  deal  in  any  comprehensive  way  with  the 
whole  subject  of  speculation,  investment,  and  money. 

That  there  should  be  this  vacuum  in  literature  is  all  the 
more  extraordinary  because  Wall  Street  has  now  become 
the  second  market  of  the  world,  and  is  probably  soon  to 
become  the  first.  Its  growth  in  the  past  five  years  has 
been  marvelous.  Its  power  is  immense.  Its  influence  for 
good  or  ill  on  the  destinies  of  the  country,  and  indeed  of 
the  whole  world,  is  measureless.  It  is  time,  therefore,  that 
an  adequate  account  should  be  given  of  this  important 
center  of  money  and  speculation.  Hence  the  author  has 
undertaken  the  writing  of  this  book,  which  he  hopes  may 
be  of  value  not  only  in  schools  of  commerce,  but  also  to 
all  who  desire  to  obtain  a  glimpse  behind  the  scenes  of  the 
great  stage  of  Wall  Street.  He  realizes  fully  that  it  is  im- 
possible to  put  within  a  volume  of  this  size  an  exhaustive 
description  of  the  mechanism  of  speculation  and  invest- 
ment and  a  complete  history  of  the  stock  market ;  but  it 
has  been  possible,  he  thinks,  to  present  a  satisfactory  state- 
ment of  the  evolution  of  Wall  Street ;  of  the  origin,  the 
meaning,  the  scope,  and  the  operations  of  the  stock  market ; 
of  the  mechanism  of  the  Stock  Exchange ;  of  the  connec- 


PREFACE  ix 

tion  between  speculation  and  the  banks ;  of  the  methods  of 
the  money  and  exchange  markets  and  of  the  main  forces 
controlling  them.  It  has  been  his  aim  to  carry  the  reader 
through  all  the  different  stages  from  the  manufacturer  of 
new  stocks  and  bonds  to  the  consumer  or  investor.  Some 
account  is  given,  therefore,  of  the  promotion  and  organiza- 
tion of  new  companies ;  of  the  floating  of  new  securities ;  of 
their  listing  and  marketing  in  the  Stock  Exchange ;  of  the 
methods  of  speculation ;  of  the  hypothecation  of  securities 
for  loans ;  of  the  bank  statement ;  of  gold  shipments ;  of  ma- 
nipulation and  corners  ;  and  of  bucket-shops  and  other  at- 
tendant evils  of  the  financial  district. 

The  history  of  Wall  Street  in  the  opening  chapter  is 
merely  a  sketch,  and  necessarily  so,  as  the  aim  has  been  to 
give  a  picture  of  the  present  rather  than  an  account  of  the 
past ;  but,  brief  as  this  sketch  is,  the  author  believes  that  it 
is  the  first  attempt  to  give,  in  regular  sequence,  a  statement 
of  the  development  of  "Wall  Street  in  the  past  one  hundred 
and  ten  years. 

In  the  carrying  out  of  his  design  the  author  has  en- 
deavored, on  the  one  hand,  to  avoid  the  vice  of  fine  writing, 
and,  on  the  other,  the  defect  of  too  strict  adherence  to 
scientific  treatment.  There  has  been  little  room  for  picto- 
rial description.  The  author,  moreover,  has  conceived  his 
duty  to  be  that  of  a  reporter  rather  than  of  an  editor.  Pie 
has  sought  to  present  the  facts  as  they  are,  leaving  to  others 
to  inquire  why  they  are  not  something  very  different.  He 
has  endeavored  to  maintain  an  impartial  attitude  toward 
Wall  Street,  neither  seeking  to  defend  it  against  just  crit- 
icism nor  joining  in  the  too  common  assault  upon  it  as  a 
blot  upon  civilization.  Xo  one  can  study  this  theme  with 
unbiased  mind  without  being  impressed  with  the  indis- 
pensable place  the  stock  market  fills  in  modern  business,  of 
the  great  value  of  its  manifold  services  to  the  world,  and  of 
the  extraordinary  efficiency  of  its  mechanism  ;  and  without, 
at  the  same  time,  realizing  how  vast  are  the  evils  to  which 


X  THE  WORK  OP  WALL  STREET 

it  gives  rise,  how  short  and  easy  is  the  step  from  beneficent 
investment  to  reckless  and  unprincipled  gambling,  and  how 
great  is  the  peril  of  overspeculation. 

To  Mr.  Thomas  F.  Woodlock  the  author  is  indebted 
for  valuable  suggestions  and  material  used  in  the  chapter- 
on  Values  and  Prices.  To  Mr.  R.  P.  Doremus,  Chairman 
of  the  Clearing-House  Committee  of  the  New  York  Stock 
Exchange,  he  is  indebted  for  the  opportunity  to  make  a 
close  study  of  that  remarkable  institution,  and  the  chapter 
on  the  Stock  Clearing-House  has  been  read  and  approved 
by  him.  The  author  also  desires  to  acknowledge  many 
courtesies  and  much  assistance  received  from  Mr.  William 
Sherer,  Manager  of  the  Bank  Clearing-House ;  Mr.  James 
G.  Cannon,  Yice-President  of  the  Fourth  National  Bank ; 
Mr.  James  McGovern,  Mr.  Charles  L.  Burnham,  Mr.  D. 
MacGreggor,  Mr.  John  W.  Dods worth,  Mr.  C.  L.  Healy, 
Mr.  B.  Nachmann,  Mr.  T.  C.  Martin,  and  Mr.  Samuel  S. 
Jessup ;  but  he  expressly  absolves  them  from  all  responsi- 
bility for  any  misstatements  that  may  unhappily  have  crept 
into  the  volume  unobserved.  The  author  also  will  be  par- 
doned for  making  grateful  mention  of  the  encouragement 
and  help  he  has  received  from  his  wife  in  the  performance 
of  an  arduous  task  under  somewhat  adverse  conditions. 

S.  S.  P. 


CONTENTS 


CHAPTER  PAGE 

I. — EVOLUTION  OF  WALL  STREET 1 

Origin  of  money,  stocks,  and  speculation — Beginnings  of  the  English 
and  French  stock-markets — Wall  Street  has  imported,  but  American- 
ized their  methods — Early  history  of  the  Street — Speculation  that  set 
in  after  the  Revolutionary  War — The  brokers'  agreement  of  1792— 
The  first  financial  machinery — The  stock-market  of  1801 — Panic  of 
1812 — Early  conference  of  bankers — Organization  of  the  Stock  Ex- 
change— New  York  forges  ahead  of  Philadelphia — Foreign  bankers 
appoint  American  agents— Listing  of  first  railroad  stock — London 
trading  in  American  securities — Struggle  between  Jackson  and  the 
United  States  Bank — Excited  speculation  between  1830  and  1840 — 
Early  market  reports — Panic  of  1837-'41 — Philip  Hone's  description  of 
Wall  Street  in  1842— Establishment  of  the  Subtreasury  system- 
Boom  caused  by  discovery  of  gold  in  California — Overspeculation 
brings  on  panic  of  1857 — Wall  Street  during  the  civil  war — Establish- 
ment of  bank  and  stock  clearances,  and  introduction  of  the  cable,  the 
stock  indicator,  and  the  telephone — Speculation  in  gold — Black  Friday 
and  the  Erie  wars — Panic  of  1873 — The  Exhange  closes  its  doors — 
Boom  of  1879— Panics  of  1884,  1890,  and  1893— The  McKinley  boom- 
Men  who  have  made  \Vall  Street  famous — Eecent  changes  in  architec- 
ture and  methods — Expansion  of  the  mechanism  of  money  and  specula- 
tion. 

II. — GENERAL  VIEW  OP  WALL  STREET 30 

Growth  of  a  century — Boundaries  of  the  financial  district — Position 
of  its  prominent  buildings — Concentration  of  capital  in  the  Street — Its 
expanding  power— Comparison  with  London — The  debtor  nation  be- 
coming the  creditor. 

III. — THE  STOCK-MARKET 37 

A  place  where  incomes  are  bought  and  sold— Macaulay's  account  of 
the  beginnings  of  the  English  market — The  reason  for  such  a  market 
and  the  evils  to  which  it  is  exposed — Stock  exchanges  essential  to  civ- 
ilization— Provide  places  for  investment  of  savings — Savings-bank 
depositors  and  insurance  policy-holders  in  the  market  by  proxy — Ad- 

xi 


Xll  THE  WORK  OF   WALL  STREET 

CHAPTER  PAGE 

vantages  of  stocks  and  bonds  for  investment — Upon  the  foundation  of 
investment  has  been  built  a  vast  superstructure  of  speculation — Lines 
drawn  between  investment  and  speculation  and  speculation  and 
gambling — The  merchant  and  the  speculator — Speculation  a  method  for 
adjusting  differences  of  opinion  as  to  future  values — Point  where  it  be- 
comes a  disease  of  the  mind — Public  in  the  Street — Entire  supply  of 
stocks  sold  three  times  over — Study  of  records  of  sales  and  what  may 
be  learned  from  them — Sales  m  bull  and  bear  periods  of  twelve  years 
— Division  of  the  market  into  manipulation,  Room  trading,  and  actual 
business  by  pools  and  public — Average  number  of  persons  in  the  mar- 
ket all  the  time — Bulls  and  bears,  longs  and  shorts,  professionals  and 
lambs — Average  number  of  different  stocks  traded  in — Eailroads  and 
industrials — The  different  groups  of  stocks — Sympathetic  effect  of  one 
group  upon  another. 

IV. — VALUES  AND  PRICES 55 

The  table  of  sales  and  quotations — Phenomena  of  sudden  changes  in 
prices — Wide  fluctuations  in  a  day,  a  month,  and  a  year — Stocks  paying 
the  same  dividends  sell  at  different  prices — Difficult  to  reconcile  the 
apparent  inconsistency  of  prices — What  constitutes  value  ? — Wall 
Street  is  always  striving  to  discount  the  future — Prices  often  vary 
from  the  true  measures  of  value — Effect  of  manipulation — Scientific 
theory  of  values  and  prices — The  primary,  secondary,  and  tertiary 
movements — Close  study  of  real  values  essential  to  success — The  law 
of  averages — Stock-market  charts  and  systems — Gould's  description  of 
Wall  Street. 

V. — THE  STOCK  COMPANY 67 

The  stock  certificate  the  corner-stone  of  Wall  Street — The  corporation 
denned — Tendency  to  convert  all  forms  of  business  into  companies — 
Advantage  over  partnerships — Control  of  a  company — Various  meth- 
ods for  safeguarding  control — Certificates  of  stock  described — Require- 
ments of  the  Exchange — How  a  stock  company  is  formed — Work  of  the 
promoter,  the  banker,  the  lawyer,  and  the  underwriting  syndicate — 
Progress  of  a  stock  certificate  from  the  organizer  to  the  investor — New 
Jersey  incorporations — Definitions  of  a  trust — Holding  companies — 
Stock  watering — Divisions  of  stock,  preferred  and  common — Various 
classes  of  bonds — Foreclosure  of  a  mortgage — Creating  a  debt  to  pay 
dividends  illegitimate  finance. 

VI. — LISTING  OF  SECURITIES 81 

One  fifth  of  the  nation's  wealth  listed  in  the  Stock  Exchange— Number 
and  amount  of  stocks  and  bonds  listed  in  1902— Comparison  with  Lon- 
don— The  Exchange  does  not  guarantee  values,  but  has  strict  rules 
governing  admission  to  the  list — The  two  departments,  Listed  and  Un- 
listed—Requirements of  the  former — Full  reports  of  operation  and 
financial  condition  recommended. 


CONTENTS  Xlll 

CHAPTER  PAGE 

VII. — THE  UNLISTED  DEPARTMENT 87 

Conditions  that  led  to  its  establishment— Difference  between  listed  and 
unlisted  stocks — Eequirements  for  the  latter — Companies  that  are 
unwilling  to  give  public  information  of  their  operations — Need  of  pub- 
licity— President  Koosevelt's  policy. 

VIII. — THE  NEW  YORK  STOCK  EXCHANGE 91 

Its  objects  and  mechanism — Insists  upon  honorable  dealings — Limits 
to  its  powers  and  responsibilities — A  national  institution — Number  of 
out-of-town  members — Branch  offices — Members  who  are  principals — 
Two-dollar  brokers — Eooin  traders — Specialists — Average  attendance — 
Qualifications  for  membership — Values  of  seats — Expulsion  for  fraud — 
Eates  of  commission — Hours  of  opening  and  closing — Duties  of  the 
Chairman — Scenes  at  the  opening — The  Exchange  as  a  show  place  for 
tourists — Methods  of  trading — The  brokers,  pad — Device  for  calling 
members— Orders  by  telephone — Work  of  a  Board  member — Prece- 
dence of  bids  and  offers — No  fictitious  trading  permitted — Sale  of  privi- 
leges prohibited — System  of  comparisons — Rules  for  delivery — Assign- 
ment of  stock — Ex-dividend  transactions — Borrowing  of  stocks — Sell- 
ing short  explained — Bond  dealings — Stock  Exchange  failures — 
Government  of  the  Exchange — Distinction  of  the  presidency — The 
new  building — Mechanism  compared  with  the  London  Stock  Ex- 
change— Arbitrage  dealings. 

IX. — NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE       .        .        .     116 

Growth  of  stock-market  limited  by  ability  of  money  market — Limit 
seemed  to  be  reached  in  1892 — Stock  clearances  were  then  established 
— Early  history — Eeport  of  special  committee — Legality  of  clearances 
— System  proved  adequate  in  panic  of  1893  and  boom  of  1901 — Clear- 
ances in  those  years — Stock  Clearing-House  capable  of  indefinite  expan- 
sion— Operation  of  clearances  explained,  with  illustrations  of  blanks 
and  forms  used — Secrecy  maintained. 

X. — TOOLS  OF  WALL  STREET 133 

Most  of  the  tools  are  time-savers — Work  of  the  stock  indicator — Ab- 
breviations of  the  tape — Number  of  impressions  in  a  year — Bird's-eye 
view  of  twelve  years — The  ticker  a  time-keeper — Exchange  reports, 
but  does  not  guarantee  quotations — Work  of  the  telegraph — Leased 
wires — The  cable  has  revolutionized  the  commerce  of  the  world — 
Cable  codes — A  thousand  cable  messages  a  day — The  telephone  in 
Wall  street — The  news  agencies — The  market  reports — First  financial 
paper. 

XI. — LANGUAGE  OF  WALL  STREET 145 

The  many  technical  and  slang  words  and  phrases  employed — Their 
individual  significance  and  related  meaning — Communities  of  interest 
— Many  of  the  terms  as  old  as  speculation  itself— Origin  of  some  of  the 
terms. 


xiv  THE  WORK  OP  WALL  STREET 

CHAPTER  PAGE 

XII. — THE  CURB  MARKET 152 

Affinity  between  stock-brokers  and  curbstones — The  early  curb  mar- 
kets of  London  and  Paris — The  stock-market  was  born  on  the  street — 
Present  meeting-place — Extent  and  methods  of  business — No  competi- 
tion with  the  Exchange — Freedom  of  the  market — Facilities  for  manip- 
ulation. 

XIII. — THE  BROKER  AND  HIS  OFFICE 156 

Henry  Adams's  account  of  a  broker — Different  kinds  of  brokers — Char- 
acteristics of  brokers — What  they  must  know — Breadth  of  their  horizon 
— Sometimes  a  power  outside  of  their  own  class — Brokers  who  specu- 
late and  brokers  who  do  a  strictly  commission  business — Need  of 
making  a  wise  choice  of  a  broker — Law  of  stock  brokerage — The  large 
commission  house  described — A  strange  environment— Opening  an 
account — Policy  in  regard  to  advising  customers — Amount  of  margins 
required — -A  customer's  control  over  his  account — The  statement  ren- 
dered— The  broker's  daily  routine. 

XIV". — THE  INVESTMENT  BUSINESS 170 

John  Jacob  Astor  would  trust  only  himself  in  making  investments — 
Point  where  investment  may  become  mere  speculation — Wall  Street's 
elaborate  machinery  for  investments — The  promoter  flourishes  in  every 
form — The  standpoints  from  which  to  study  investments — Yield,  se- 
curity, and  duration — Methods  of  estimating  bond  values — Interest 
rates  a  generation  ago  and  now. 

XV.— THE  MONEY  MARKET 174 

Is  a  credit  market — A  bank  is  a  manufactory  of  credits — Business  of 
the  world  done  on  credit— Money  unused  a  burden  ;  in  action,  a  benefi- 
cence— Extent  to  which  the  banks  multiply  the  power  of  money — The 
capitalist  and  the  banker — The  various  kinds  of  banks — The  National 
are  the  reserve  banks — Needle  of  the  financial  compass  points  toward 
New  York — The  Bank  Clearing-IIouse  and  its  place  in  the  Wall  Street 
mechanism — Loan  certificates — Point  of  contact  between  money  mar- 
ket and  stock-market— Brokers  obliged  to  get  credit  from  the  banks — 
The  margin  demanded  by  the  latter — Certification  and  overcertifica- 
tion  of  checks  explained  in  detail— Amount  of  certification  required — 
Making  of  call  loans — Kates  established  in  the  Exchange— Banks 
do  not  rejoice  in  high  rates — Calling  of  loans — The  loan  envelopes — 
Substitution  of  one  security  for  another — Kind  of  collateral  demanded 
by  the  banks — Marking  up  rates — The  banks'  protection — Agreement 
with  customers — Time  loans. 

XVI. — THE  BANK  STATEMENT 200 

Stock-market  sensitive  to  changes  in  the  money  rate — Statement,  when 
issued  and  how  made  up — The  law  of  averages— Four  most  important 
items — The  legal  reserve — Significance  and  effect  of  a  deficit — The 
pyramid  of  credit — Etl'ect  of  the  trust  company  business — Meaning  of 


CONTENTS  XV 

CHAPTER  PAGE 

the  word  deposits — The  cash  holdings — Possible  manipulation  of  the 
money  market — Principal  movements  of  money — Currency  to  move 
the  crops — Telegraphic  transfers  through  the  Subtreasury — New 
York  possesses  many  sources  of  supply  of  credit — Notable  expansion 
in  the  size  of  the  money  market — Great  banks  created  and  chains  of 
banks  formed— Bank  of  England  rate  of  discount. 

XVII. — SUBTREASURY  AND  ASSAY  OFFICE 215 

Power  of  the  Secretary  of  the  Treasury  in  the  markets — Intimate  rela- 
tions between  the  Treasury  and  the  Street — Meetings  of  bankers  at  the 
Subtreasury — High  standing  of  the  office  of  Assistant  Treasurer — 
Proposed  abolition  of  Subtreasury  system — Problem  of  getting  a  sur- 
plus out  of  the  Treasury  into  the  channels  of  trade  and  business — 
Secretary  Gage's  central  bank  plan — Treasury  policy  of  purchasing 
bonds  to  relieve  a  money  stringency — Letter  from  Assistant  Secretary 
Taylor — Secretary  Shaw's  plan  of  relief  in  money  stringency  of  Sep- 
tember, 1902 — Subtreasury  as  an  agent  for  the  transfer  of  currency — 
Work  of  the  Assay  Office — Dual  character  of  gold — Sale  of  bars — 
Abrasion  of  coin  in  transit — History  of  the  Subtreasury  and  Assay 
Office  buildings. 

XVIII. — FOREIGN  EXCHANGE  AND  THE  BALANCE  OF  TRADE  .  \  224 
Few  have  complete  grasp  of  the  subject — Experts  trained  in  German 
Universities — How  the  system  of  foreign  exchange  was  evolved — 
Popular  misconceptions — Actual  rate  of  exchange  depends  not  only  on 
difference  in  value  of  coins  but  on  state  of  international  credits — Bills 
of  exchange — Exchange  market  a  vast  international  clearing-house  in 
which  balances  are  paid  in  gold — Gold  shipments,  how  controlled — No 
boundary  lines  in  finance — Movement  of  money  to  the  highest  market 
— The  balance  of  trade — Even  Wall  Street  prone  to  misconceive  its 
significance — The  many  blind  items — Careful  estimate  of  the  unknown 
quantities — What  the  "United  States  has  to  pay  Europe,  and  what 
Europe  has  to  pay  the  United  States — Calculations  of  the  profits  of 
gold  shipments  to  London  and  Paris  in  bars  and  coin — Modus  operand! 
of  making  sterling  loans. 

XIX. — PRIVATE  BANKERS  AND  UNDERWRITING  SYNDICATES  .  .  238 
Power  of  the  great  bankers — They  supply  the  sinews  of  war — Their 
field  of  operations  as  wide  as  the  world  itself— They  are  the  powers  be- 
hind the  throne — Par  value  of  securities  of  the  corporations  with  which 
one  banking  house  is  identified  is  $5,000,000,000— J.  Pierpont  Morgan 
the  only  man  to  deal  in  billions  of  dollars — His  account  of  his  own 
business — A  conference  at  Morgan's — Underwriting  of  securities — Com- 
missions and  possible  profits — Great  specialists  in  finance  charge  high 
for  their  services. 


xvi  THE  WORK  OF   WALL  STREET 

CHAPTER  PAGE 

panics — Safeguards — Clearing-House  loan  certificates — Treasury  re- 
lief— Need  of  currency  reform — Difference  of  opinion  as  to  what  should 
be  done — Asset  currency  or  emergency  circulation. 

XXI. — MANIPULATION  AND  CORNERS 255 

Adroit  manipulation  and  dishonest  manipulation — False  reports  and 
tips — Wash  sales  and  matched  orders — The  higher  type  of  manipula- 
tion a  millionaire's  game — How  secrecy  is  maintained — Pool  operations 
— Supporting  stocks  to  secure  credit — Bear  manipulation — Uncovering 
stop  orders — New  York  manipulation  via  London — Not  easy  to  fathom 
the  operations  of  manipulators — A  corner  described — The  most  famous 
corners — Corners  in  products  usually  failures. 

XXII.— THE  STATE  OF  TRADE 262 

Wall  Street  may  often  control  prices,  but  the  country  makes  values — 
Effect  of  depression  of  trade  upon  speculation — Two  excellent  barome- 
ters of  trade  activity— Bank  clearings  and  railroad  earnings — Railroad 
reports,  how  analyzed — Scientific  form  of  the  modern  report — Crop 
reports. 

XXIII.— PESTS  OF  WALL  STREET 268 

The  Street  filled  with  bogus  brokers— Bucket-shops  and  blind-pool 
sharps — Exchange  wages  war  upon  them — Advertising  by  brokers — 
No  advertisements  permitted  by  the  London  Exchange — The  Street 
should  not  be  judged  by  the  pests  of  the  stock-market. 

BlBLIOGRAHPY 273 

INDEX 275 


LIST   OF  ILLUSTRATIONS 


The  Xew  York  Stock  Exchange Frontispiece 

Map  of  the  Wall  Street  district 31 

The  brokers'  pad 101 

Buyers'  and  sellers'  clearance  tickets 124 

The  clearance  sheet 125 

The  Clearing-House  draft 126 

Statement  of  stock  to  deliver 127 

The  allotment  sheet 129 

The  stock  tape  as  it  comes  from  the  "ticker" 137 

Chart  showing  number  of  impressions  on  tape  .....  139 

Broker's  statement  rendered  to  customer 166 

Form  used  in  calling  loan 187 

The  loan  envelopes 189,  190 

Bank's  memorandum  of  loan ,  191 

Form  used  in  making  substitutions 193 

Call  for  additional  collateral 194 

Form  in  marking  up  rate 190 

The  inverted  pyramid  of  credit 207 

xvii 


CHAPTEK  I 

EVOLUTION   OF    WALL    STREET 

LONG  indeed  has  been  the  evolution  producing  the  sen- 
sitive but  powerful  mechanism  of  Wall  Street.  Man  early 
in  his  development  in  civilization  realized  the  necessity  of 
a  medium  of  exchange  and  invented  money.  It  is  recorded 
in  Genesis  that  Abraham,  desiring  a  burial-place  for  his 
wife  Sarah,  oifered  money  for  the  cave  of  Machpelah.  The 
laws  of  Moses  permitted  lending  upon  usury  to  a  stranger, 
but  not  "  unto  thy  brother."  Usury,  in  those  early  days, 
was  practically  synonymous  with  the  more  modern  term 
"  interest,"  the  first  use  of  which  in  its  present  significance, 
as  meaning  the  price  of  credit,  appears  to  have  been  in  an 
Act  of  Parliament  in  the  reign  of  James  I.  Coins  were 
introduced  by  the  Lydians.  Paper  money  is  said  to  have 
been  first  issued  in  China  a  thousand  years  before  Christ. 
The  Greeks  theorized  about  the  nature  of  money  and  credit, 
and  laid  the  foundation  of  the  study  of  economics.  It  was 
Demosthenes  who  said  that  there  were  two  kinds  of  wealth : 
money  and  credit,  the  latter  being  the  greater.  Checks, 
bills  of  exchange,  and  the  art  of  bookkeeping  had  their 
beginnings  in  ancient  Rome.  The  Italians  of  the  middle 
ages  invented  double-entry  bookkeeping.  The  first  bank 
was  that  of  Venice,  founded  in  the  twelfth  century.  Bills 
of  exchange  were  introduced  into  England  early  in  the 


2  THE  WORK  OF   WALL  STREET 

fourteenth  century.  Banking  in  the  modern  sense,  how- 
ever, dates  from  the  establishment  of  the  Bank  of  England 
in  1649. 

The  Roman  collegium  was  the  ancient  type  of  the  mod- 
ern corporation.  But  while  companies  existed  in  Rome, 
nothing  is  known  as  to  the  way  in  which  the  interests  of 
the  different  persons  in  the  corporations  were  represented. 
Stock-certificates  wrere  a  product  of  the  seventeenth  cen- 
tury. The  first  great  modern  company  was  the  East  India 
Company,  which  was  incorporated  in  1600.  Soon  after 
that  the  Hudson  Bay  Company  sprang  into  existence. 
But  it  was  not  until  the  latter  part  of  that  century  that  the 
shares  in  these  companies  began  to  be  actively  traded  in. 

Stock  speculation  is  therefore  a  development  of  mod- 
ern business,  although  the  taking  of  long  risks  in  trade  is 
as  old  as  commerce  itself ;  and  Homer  relates  how  after  the 
combat  of  Hector  and  Ajax,  the  fleet  arriving  from  Lemnos' 
strands  discharged  cargoes  of  wine,  which  were  sold  to  the 
hosts  of  warriors  in  exchange  for  brass,  iron,  oxen,  and 
slaves.  This  was  truly  a  great  speculation. 

According  to  Macaulay,  the  term  "  stock-jobbers  "  was 
first  used  in  England  in  1688,  and  he  gives  an  entertaining 
account  of  the  beginnings  of  the  English  stock-market  at 
that  time.  A  multitude  of  new  companies,  genuine  and 
bogus,  were  organized,  and  an  active  speculation  in  their 
shares  set  in,  the  first  boom  in  industrials  of  which  we 
have  any  account.  In  1693  a  play  was  produced  satirizing 
stock-brokers.  Shakespeare,  years  before,  had  used  the 
word  "broker"  as  many  as  six  times,  but  not  as  referring 
to  dealers  in  stocks.  "  Time  bargains,"  "  bulls,"  "  bears," 
"  puts,"  and  other  technical  terms  of  speculation  were  first 
used  at  the  end  of  the  seventeenth  century  and  at  the 
beginning  of  the  eighteenth.  So  large  became  the  unor- 
ganized market  for  securities,  that  in  1697  Parliament 
enacted  a  law  to  check  the  evils  of  speculation,  and  provid- 
ing a  system  of  licenses  for  brokers.  Three  or  four  years 


EVOLUTION  OF  WALL  STREET  3 

later  Daniel  DeFoe,  in  one  of  his  pamphlets,  attacked 
stock-jobbing. 

This  early  mania  for  stock  speculation  reached  its  height 
at  nearly  the  end  of  the  first  quarter  of  the  eighteenth  cen- 
tury, in  the  promotion  of  the  South  Sea  Company  in  Eng- 
land and  of  John  Law's  Mississippi  Company  in  France. 
The  collapse  of  these  two  bubble  companies  caused  the 
world's  first  great  panic  in  i720-'2-t.  Guizot,  in  his  history, 
gives  a  short  but  interesting  account  of  the  career  of  John 
Law,  and  of  the  intense  excitement  created  in  Paris  by  his 
bold  financial  conceptions.  It  was  found  necessary  to  close 
the  entrances  to  Quincompoix  Street,  where  the  Paris 
brokers  had  their  headquarters,  in  order  to  put  a  stop  to 
the  feverish  tumult  arising  from  desperate  speculation.  So 
many  immense  fortunes  were  won  and  then  lost  at  that 
time  that  this  ditty  was  everywhere  sung  in  the  streets : 

"  On  Monday  I  bought  share  on  share  ; 
On  Tuesday  I  was  a  millionaire  ; 
On  Wednesday  took  a  grand  abode  ; 
On  Thursday  in  my  carriage  rode  ; 
On  Friday  drove  to  the  opera  ball  ; 
On  Saturday  came  to  the  pauper's  hall." 

Shortly  after  the  failure  of  John  Law  the  Paris  Bourse 
was  founded,  in  1720,  but  the  "Change  de  Paris/'  out  of 
which  it  may  be  said  to  have  sprung,  had  a  history  running 
back  to  1304. 

The  English  Parliament  passed  an  act  to  prevent  stock- 
jobbing in  1734,  and  forty  years  later  another  act  was 
passed  to  prevent  short  selling.  For  nearly  a  century  the 
curb  market  existed  in  'Change  Alley  in  London,  and  on 
July  5,  1773,  the  London  Stock  Exchange  was  formed. 
Thus  the  complicated  machinery  of  the  money-  and  stock- 
markets,  the  banks,  the  exchanges,  and  the  processes  of 
speculation  are  importations  into  Wall  Street.  This  coun- 
try has  improved,  has  Americanized  them,  but  did  not  origi- 
nate them. 


4  THE   WORK  OF  WALL  STREET 

Less  than  forty  years  after  the  organization  of  the  Lon- 
don Stock  Exchange  a  stock-market  began  to  develop  in 
Wall  Street.  In  the  United  States,  as  well  as  in  England, 
a  craze  for  speculation  had  sprung  up  after  the  long  war  of 
the  American  Revolution. 

The  struggle  for  independence  had  strained  the  re- 
sources of  the  colonies  to  the  utmost,  and  much  suffering 
had  been  caused  their  people.  But  with  the  revival  of 
commerce  after  the  war  better  times  set  in.  The  first  Con- 
gress, sitting  in  Federal  Hall,  on  Wall  Street,  had  issued 
bonds,  called  stock,  to  assume  the  war  debts  of  the  States, 
and  about  $80,000,000  of  securities  were  thus  offered  to  the 
public.  Other  stocks  had  also  been  issued.  In  December, 
1781,  the  Bank  of  North  America  had  been  incorporated 
in  Philadelphia.  Less  than  three  years  later,  in  February, 
1784:,  a  meeting  of  merchants  was  held  to  establish  the 
Bank  of  New  York.  Hamilton  drew  up  the  plan  and  con- 
stitution of  this  bank,  the  first  to  be  founded  in  this  city. 
Among  the  places  at  which  subscriptions  were  received  was 
the  office  of  William  Maxwell,  No.  4  Wall  Street,  In 
1791  Congress  passed,  and  Washington  signed,  Hamil- 
ton's measure  for  the  establishment  of  the  first  United 
States  Bank. 

Speculation  in  the  securities  thus  created  set  in.  Wall 
Street  became  a  market  for  them.  It  is  recorded  that  early 
in  1792  there  was  an  office  for  the  public  sale  of  stocks  at 
No.  22  Wall  Street.  A  stock  list  of  that  year  gives  quo- 
tations of  6  per  cent  United  States  stock,  and  of  the  shares 
of  the  United  States  Bank  and  the  Bank  of  North  America. 
A  number  of  men  engaged  in  the  business  of  buying  and 
selling  these  stocks  on  commission.  Their  favorite  meeting- 
place  was  near  a  buttonwood  tree  which  stood  in  front  of 
No.  68  Wall  Street.  In  1792  Leonard  Bleeker  and  23  other 
brokers,  as  a  result  of  a  meeting  held  at  Corre's  Hotel, 
entered  into  an  agreement  "  solemnly  promising  and  pledg- 
ing" themselves  "not  to  buy  or  sell  any  kind  of  public 


EVOLUTION  OF  WALL  STREET  5 

stock  at  a  less  rate  than  £  per  cent  commission  on  the  specie 
value."  The  date  of  this  agreement  was  May  17.  This 
was  the  earliest  beginning  of  the  Stock  Exchange,  although 
there  was  no  regular  organization  until  twenty-five  years 
later.  With  this  agreement  may  be  said  to  have  begun 
the  history  of  Wall  Street  as  the  seat  of  the  Stock- 
Market. 

The  whole  country  then  contained  about  as  many  in- 
habitants as  the  State  of  Ohio  now.  New  York  had  a 
population  of  33,000,  and  about  3,400  dwelling-houses.  The 
settled  part  of  the  city  did  not  extend  above  Chambers 
Street.  Wall  Street,  so  called  from  the  old  stockade,  or 
wall,  that  protected  the  early  Dutch  city  from  the  Indians, 
was  in  1792  an  important  street.  The  City — afterward 
called  the  Federal — Hall  had  been  erected  there  in  1699,  on 
the  present  site  of  the  Subtreasury,  and  here  Washington 
had  been  inaugurated  as  President  in  1789.  Hamilton 
lived  nearly  opposite,  not  far  from  the  corner  of  Broad 
Street.  The  lower  part  was  even  then  given  up  to  trade, 
but  the  upper  part  was  a  parade-ground  of  fashion,  and 
many  leading  families  had  their  residences  there.  Trinity 
Church  then,  as  now,  stood  on  Broadway  facing  Wall 
Street. 

As  early  as  1752  the  merchants  had  a  meeting-place, 
or  Exchange,  on  Broad  Street  near  Pearl.  In  1708  the 
Chamber  of  Commerce  was  organized  in  the  long  room  of 
Fraunce's  Tavern,  a  building  still  standing;  and  it  is  of 
interest  to  note  that  questions  of  money  engaged  its  earliest 
attention.  In  1786  the  Chamber  protested  in  vain  against 
the  State  issuing  irredeemable  paper  money  as  legal  tender. 
In  1794  the  merchants  established  the  Tontine  Coffee-House 
on  Wall  Street,  and  this  continued  the  center  of  the  busi- 
ness life  of  New  York  until  1827.  Here  the  stock-brokers 
met  for  some  time. 

The  first  financial  machinery  required  by  the  new  coun- 
try was  banks,  and  the  first  great  lesson  taught  by  these 


6  THE  WORK  OF  WALL  STREET 

institutions,  as  lias  been  well  said,  was  punctuality.  The 
value  of  time  as  an  asset  in  business  became  more  and  more 
appreciated.  Tlie  success  of  the  Bank  of  New  York  led  to 
the  organization  of  the  Bank  of  the  Manhattan  Company,  in 
the  starting  of  which  Aaron  Burr  was  largely  instrumental. 
From  1792  to  1801  the  number  of  banks  increased  from  3 
to  23,  with  a  total  capital  of  $33,550,000.  A  few  fire  and 
marine  insurance  companies  had  also  been  organized.  The 
supply  of  securities  available  for  investment  and  specula- 
tion made  therefore  quite  a  stock-market.  The  following 
advertisement,  which  appeared  in  the  first  issue  of  the 
Evening  Post,  November  Ifi,  1801,  gives  an  idea  of  the 
dimensions  of  this  market : 

PRICES  OF  STOCKS. 

G  per  Cent.  Funded  Debt 98  3-4  per  Cent. 

3  per  Cent. ...do do 56  1-2  a  57 

8  per  Cent.  Loan 112  1-2 

6  per  Cent.  Navy  Loan par. 

BANK  STOCK. 

United  States  Bank 143  a 143  1-2  p.  ct. 

New-York  (dividend  off) 131  1-2 

Manhattan 132 

INSURANCE   SHARES. 

New-York  Insurance  Co 128  per  cent. 

Columbian ditto 13?  a  138 

United ditto 118  a  119 

B ills  of  Exchange  at  GO  days  siyltt. 

On  London 100  a  101  per  cent. 

On  Hamburgh 36  a  38  cts.  p.  mk.  b. 

On  Amsterdam 40  cents  per  guilder. 

E.  HEXJAMIX.  Ktoc.l;  and  Exchange  Kroner, 
November  14.  No.  50  Wall-Street. 


EVOLUTION  OF  WALL  STREET  7 

At  this  time  all  the  banks  and  insurance  companies  but 
one,  and  the  Chamber  of  Commerce,  were  located  in  Wall 
Street,  then,  as  now,  the  financial  center.  As  the  banks 
were  paying  15  to  18  per  cent  dividends,  there  was  no  small 
demand  for  their  stocks.  With  the  growth  of  the  country 
and  the  rapid  settlement  of  what  is  now  known  as  "  the 
Middle  West,"  which  was  then  the  frontier,  new  banks 
were  created,  and  the  speculation  in  their  shares  increased. 
The  history  of  Wall  Street  from  this  time  becomes  practi- 
cally the  history  of  the  agricultural,  industrial,  and  com- 
mercial development  of  the  United  States,  a  theme  much 
too  large  for  the  scope  of  this  book. 

The  banking  capital  of  the  country  in  1812  was  more 
than  $70,000,000.  In  this  year  the  second  struggle  with 
England  began,  and  the  long  closing  of  the  ports  and  the 
cost  of  the  war  caused  much  distress.  The  Government 
had  difficulty  in  floating  a  war  loan.  The  bankers  held  a 
meeting  at  the  Manhattan  Bank  on  August  22,  and  took 
measures  for  their  protection.  Thus,  ninety  years  ago,  the 
bankers  realized  the  importance  of  concerted  action  in  finan- 
cial crises.  During  this  panic — the  first  of  any  importance 
from  which  Wall  Street  suffered — 90  banks  in  different  parts 
of  the  country  failed.  The  war  over,  a  new  period  of  ex- 
pansion set  in.  The  charter  of  the  first  United  States 
Bank  having  expired,  the  second  bank  of  that  name  was 
incorporated  in  1816,  and  for  nearly  a  quarter  of  a  century 
this  institution  virtually  controlled  the  course  of  the  mar- 
kets. Speculation  in  bank  stocks  had  become  so  extensive 
that  it  was  necessary  to  organize  the  stock-market  into  an 
exchange,  and  in  1817  the  brokers  who,  until  then,  had 
been  working  under  the  agreement  of  1792,  formed  an  as- 
sociation under  the  name  of  the  Xew  York  Stock  and  Ex- 
change Board.  This  was  the  second  great  addition  to  the 
mechanism  of  the  financial  markets,  the  first  having  been 
the  banks.  The  members  of  the  Board  agreed  not  to  give 
public  information  of  the  names  of  buyers  and  sellers  of 


8  THE  WORK  OF  WALL  STREET 

stocks.  At  tliis  time  the  outstanding  Government  securi- 
ties amounted  to  $123,000,000.  State  and  city  bonds  had 
also  been  issued,  and  many  new  banks  and  insurance  com- 
panies formed.  In  1818  the  records  of  the  Exchange  show 
that  29  different  issues  of  securities  were  dealt  in,  including 
the  stocks  of  10  banks  and  13  insurance  companies.  A  big 
speculation  was  for  years  carried  on  in  the  stock  of  the 
United  States  Bank. 

In  1807  Robert  Fulton  succeeded  in  applying  steam- 
power  to  navigation  on  the  Hudson  River.  This  achieve- 
ment, together  with  the  digging  of  canals,  resulted  in  a 
wonderful  extension  of  inland  commerce.  New  companies 
were  formed,  and  a  further  expansion  of  the  stock-market 
took  place.  In  New  York  alone,  companies  having  a  capi- 
tal of  $52,000,000  were  organized  in  1824.  In  the  same 
year  624  new  stock  companies  were  incorporated  in  Great 
Britain.  There  was  speculation  in  New  York  not  only  in 
stocks  but  in  bonds,  mines,  and  cotton.  The  mechanism  of 
Wall  Street  had  to  be  enlarged.  In  1820  the  constitution 
of  the  Stock  Exchange  was  revised.  Definite  rates  of  com- 
mission for  Government  bonds,  stocks,  mortgage  loans,  and 
foreign  and  domestic  exchange  were  adopted.  A  rule  of 
the  Exchange  prohibited  fictitious,  or  what  are  now  called 
"  wash,"  sales.  In  1821,  when  the  Morris  Canal  shares 
were  offered  to  the  public,  they  were  subscribed  for  twenty 
times  over.  The  newspapers  began  to  devote  considerable 
space  to  Wall  Street.  The  Daily  Advertiser  of  April  10, 
1822,  referring  to  the  news  just  arrived  by  ship,  that  the 
British  5s  were  to  be  reduced  to  4  per  cents,  expressed  re- 
gret that  the  price  of  our  stocks  should  be  regulated  by  the 
jobbers  of  'Change  Alley  in  London. 

The  completion  of  the  Erie  Canal  in  1825  established 
the  commercial  supremacy  of  New  York  in  the  western 
hemisphere.  Up  to  this  time  Philadelphia  had  been  the 
chief  market  of  the  country.  There,  as  has  been  seen,  the 
first  bank  was  organized  in  1781.  There  were  the  head- 


EVOLUTION   OF   WALL  STREET  9 

quarters  of  the  all-powerful  United  States  Bank,  under 
the  eventful  presidency  of  the  brilliant  Nicholas  Biddle. 
There  also,  very  early  in  the  nineteenth  century,  the  first 
American  Stock  Exchange  was  formed,  with  Matthew 
McConnell  as  president,  in  the  old  Merchants'  Coffee-House. 
It  is  related  that  before  the  New  York  Exchange  was  estab- 
lished the  brokers  sent  a  delegation  to  Philadelphia  to  get  a 
copy  of  the  constitution  of  its  Exchange,  and  information 
as  to  its  methods  of  business.  But  New  York  soon  forged 
to  the  front.  Its  population  and  commerce  outstripped 
Philadelphia's,  and  the  power  of  its  banks  and  stock-mar- 
ket was  felt  in  all  the  land.  London  bankers  began  to 
establish  branch  houses  in  Wall  Street.  In  1825  the  still 
existing  house  of  Brown  Brothers  &  Company  was  formed 
there,  as  an  offshoot  of  Alexander  Brown  &  Sons  of  Lon- 
don. In  1S37  the  Rothschilds  appointed  August  Belmont 
as  their  representative  in  New  York,  a  connection  their  suc- 
cessors have  maintained  ever  since. 

The  Stock  Exchange  in  1827  moved  into  the  Merchants' 
Exchange  Building,  which  had  just  been  erected  on  the 
site  where  the  Custom-House  now  stands.  The  city  had 
then  a  population  of  nearly  200,000.  There  were  16  banks, 
and  the  local  branch  of  the  United  States  Bank  occupied 
the  building  that  is  now  the  Assay  Office.  Two  events 
occurred  in  1829  of  supreme  importance  to  "\Vall  Street. 
One  was  the  inauguration  of  Jackson,  who  immediately 
began  his  memorable  war  on  the  United  States  Bank.  The 
other  was  the  application  of  steam  to  land  transportation. 
The  first  train  moved  by  a  locomotive  was  operated  in  that 
year.  By  1830  the  railroad  mileage  became  30,  and  eleven 
years  later  it  amounted  to  3,301.  Railroad  stocks  immedi- 
ately became  the  object  of  speculation.  In  1830  the  first 
railroad  stock — that  of  the  Mohawk  and  Hudson — was  put 
on  the  Stock  Exchange  list.  Eight  years  later  "  Yankee 
rails,"  as  they  were  called,  were  introduced  into  the  Lon- 
don market,  the  first  security  of  this  kind  to  be  traded  in 


10  THE  WORK  OF  WALL  STREET 

being  the  bonds  of  the  Camden  &  Amboy  Railroad.  Amer- 
ican stocks,  however,  had  long  before  that  time  been  specu- 
lated in  in  London.  The  official  list,  according  to  Charles 
Duguid,  contained  the  names  of  about  60.  The  panic  of 
1837  ended  the  existence  of  most  of  them.  A  New  York 
paper  of  August  3,  1835,  printed,  as  news,  the  London 
quotations  of  15  American  stocks  on  June  23.  Invest- 
ment and  speculation  in  railroad  securities  now  became  the 
chief  business  of  Wall  Street,  and  have  so  continued  until 
this  day,  although  the  "  industrials  "  are  pressing  them  in 
the  race  for  supremacy. 

The  fierce  struggle  between  Jackson  and  the  United 
States  Bank,  culminating  in  the  panics  of  1837  and  1839, 
makes  one  of  the  most  interesting  chapters  in  the  political 
and  financial  history  of  the  country.  During  the  ten  years 
from  1830  to  1840,  Wall  Street  was  the  scene  of  much  ex- 
citement and  turmoil.  The  speculation  of  that  period  was, 
in  proportion  to  the  resources  of  the  country,  as  active  as 
that  of  the  present  time.  There  "were  daring  operators 
then  as  now.  Jacob  Barker,  for  instance,  undertook  in 
1834  to  insure  the  non-removal  of  Government  deposits 
from  the  United  States  Bank  until  Congress  should  meet, 
lie  demanded  a  premium  of  25  per  cent.  A  corner  in 
Morris  Canal  and  Bank  stock  in  1835  was  the  talk  of  the 
town.  In  July  and  August  of  the  same  year  64,000  shares 
of  Harlem  stock  were  sold  for  future  delivery,  although 
the  actual  issue  of  stock  was  only  $7,000. 

The  newspapers  now  began  to  pay  much  attention  to 
the  transactions  in  Wall  Street,  and  regular  market  reports 
appeared.  On  May  13,  1835,  the  Herald,  then  published  at 
No.  20  Wall  Street,  contained  the  following: 

"  Stocks — Yesterday  the  fancy  stocks  took  a  tumble  of 
from  2  to  4  per  cent  on  some  descriptions,  the  railroads 
especially.  Money  is  beginning  to  get  scarce,  and  there  is 
some  fear  that  the  banks  mean  to  curtail.  This  impression 
does  not  prevail  generally. 


EVOLUTION  OF  WALL  STREET  11 


"SALES  AT  THE  STOCK  EXCHANGE 

"  110  shares  East  River  Insurance 99 

25  "      Manhattan  Gas  Company 129£ 

50  "  "  "  on  time 100 

150  "      Mohawk  Railroad  Company 126 

500  "      Utica  and  Schenectady,  opening 128 

350  "                                                    "         1281 

250  "      Jamaica  Railroad 189 

25  "      United  States  Bank 112^ 

160  "      UnionBank 122 

40  "  "        "      121f 

100  "      Delaware  and  Hudson 112J 

450  "  "       112£ 

200  "  "  "  "       112i 

310  "      Harlem  Railroad 106 

550  "  "        105J 

100  "  "        105i 

200  "  "  "        105J 

51  "      Dry  Dock  Bank 150 

50  "        "        "        "      1491 " 

Six  days  later  the  same  paper  said  : 

"  A  most  active  business  is  doing  in  stocks.  The  small 
bite  of  English  news — the  probability  of  stable  government 
on  the  reform  principles — has  given  additional  confidence 
to  our  moneyed  men."  The  next  week  the  same  writer  in- 
forms us  : 

"Stocks  went  up  generally  yesterday  2  to  3  per  cent. 
Xo  cause  is  assigned.  The  chief  of  the  Hebrew  interest 
dipped  deeply.  It  is  said  his  deposits  amounted  to  $500,000 
a  day — a  second  Rothschild,  truly.  The  bears'  turn  to-day. 
The  United  States  Bank  increased  its  loans  nearly  s2,000,- 
000  during  the  month  of  April,  whereat  the  Washington 
Globe  lets  off  a  large  quantity  of  thunder.  Xo  one  will 
complain  at  money  being  plenty,  but  when  the  day  of  pay- 
ment comes  it  is  almighty  awful/' 


12  THE  WORK  OF  WALL  STREET 

The  sales  of  June  26  were  "  very  large."  They 
amounted  to  7,875  shares.  In  Philadelphia,  two  days  be- 
fore, the  transactions  were  2,279.  There  were  crowds  in 
Wall  Street  then  as  now.  On  March  10,  1836,  it  was  said 
that  "  Wall  Street  was  impassable."  During  this  year  the 
Stock  Exchange  appointed  a  committee,  composed  of  Messrs. 
Ward,  Coit,  Kevins,  and  Le  Roy,  to  investigate  the  recent 
speculations  in  Harlem  stock,  and  it  was  said  by  a  financial 
writer  of  that  day  that  "  the  system  so  much  indulged  in  of 
late  of  time  bargains  and  cornering  will  probably  be  sifted 
to  the  bottom.  The  recent  operations  in  Morris  Canal 
stock,  the  Harlem  Railroad,  and  the  Montauk  Railroad 
have  been  a  series  of  puzzles  to  the  community,  as  much  so 
as  the  roulette  table  or  the  faro-bank  to  the  uninitiated 
in  gambling."  The  panic  of  1837  struck  Wall  Street  the 
preceding  year,  as  on  October  23,  1836,  nearly  a  dozen 
failures  were  announced  in  the  Street.  The  panic  swept 
over  the  entire  country,  and  was  felt  as  severely  in  Eng- 
land as  here.  New  York  bankers,  at  a  meeting  May  9, 
resolved  to  suspend  specie  payments.  From  1837  to  1839 
there  were  33,000  failures  in  the  United  States  involving 
a  loss  of  $440,000,000.  Jackson  triumphed  in  his  contest 
with  the  United  States  Bank.  This  institution  after  its 
Federal  charter  expired,  continued  in  business  under  a 
Pennsylvania  charter,  but  finally,  in  18-11,  passed  out  of 
existence  altogether.  Philip  Hone,  in  his  diary,  says  that 
the  losses  entailed  by  the  failure  of  this  bank  equaled  even 
those  of  the  great  fire  of  December  16,  1835,  and  he 
declared  it  meant  "  an  utter  destruction  of  American  credit 
in  Europe." 

The  American  of  November  25,  1841,  gives  the  follow- 
ing account  of  the  depreciation  in  prices  : 

"  To  convey  an  idea  of  the  immense  amount  of  money 
sunk  in  stocks  within  the  last  three  years,  we  give  a  list  of 
a  small  portion  only  of  those  bought  and  sold  at  our  stock 
board  alone : 


EVOLUTION   OF  WALL  STREET 


13 


PRICES. 

Within  3  years 
past. 

Present. 

United  States  Bank  

122| 

89 
92 
95 
113 

120 
80 
75 
76 
75 
74 
70 
54 
60 

4 
5 
56 
3 
30 
Nothing. 
35 
Nothing. 
60 
53 
18 
23 
23 
52" 

Kentucky  Bank            

North  American  Trust     

Farmers'  Trust                

Illinois  State  Bank  

Morris  Canal  Bank         

Mohawk  Railroad      

Paterson  Railroad             

Harlem  Railroad                   

Canton  Company            

Long  Island  Railroad     ...           

The  great  fire,  to  which  allusion  has  been  made,  de- 
stroyed 648  buildings  in  the  lower  end  of  the  city,  including 
the  Merchants'  Exchange,  in  which  the  Stock  Exchange 
had  its  Board-Room.  The  Exchange  took  up  its  quarters 
temporarily  in  Howard's  Hotel,  ~No.  8  Broad  Street.  The 
fire  was  followed  by  a  general  rebuilding,  which  trans- 
formed the  appearance  of  the  financial  district.  Former 
Mayor  Philip  Hone  walked  down  Wall  Street,  July  13, 
1842,  and  the  same  evening  recorded  his  impressions  in  his 
diary,  as  follows  : 

"  The  splendid  edifice  fronting  on  Wall  and  Pine 
Streets  is  now  entirely  completed,  and  has  been  occupied  as 
the  New  York  Custom-IIouse,  in  all  its  manifold  and  com- 
plicated departments,  since  the  1st  of  May.  The  building 
was  commenced  in  May,  1834,  and  the  edifice  furnished 
with  its  furniture  completed  in  May,  1842;  cost,  $985,000. 
The  statement  of  the  cost  of  this  magnificent  winding-sheet 
of  departed  commerce  is  taken  from  an  elaborate  and  well- 
written  description  published  in  the  Commercial  Advertiser 
of  this  afternoon.  A  stranger  walking  down  Wall  Street 
from  Broadway  would  laugh  heartily  at  these  lugubrious 
expressions  of  mine.  With  his  back  to  '  Xew  Trinity,'  the 


14  THE  WORK  OF  WALL  STREET 

most  beautiful  structure  of  stone  in  America,  he  passes  the 
Custom-House,  which  cost  $1,000,000,  8  or  10  banks,  each  a 
palace  for  the  worship  of  Mammon,  and  the  Exchange  with 
a  portico  of  granite  columns  such  as  Sir  Christopher  Wren 
had  no  notion  of.  These,  with  the  brokers'  offices  and  the 
seats  of  money-changers,  some  of  which  cost  enormous 
sums,  would  convey  to  the  mind  of  the  wayfaring  man  an 
image  wholly  different  from  that  of  commercial  distress 
and  pecuniary  embarrassment." 

"  New  Trinity,"  of  which  Mr.  Hone  speaks,  has  become 
"  Old  Trinity."  The  New  Custom-House  is  now  the  Sub- 
treasury.  The  Merchants'  Exchange  is  now  the  home  of 
the  Custom-House,  but  has  been  sold  to  the  City  Bank, 
which  will  take  possession  there  as  soon  as  the  seat  of 
customs  is  removed  to  the  building  going  up  at  Bowling 
Green. 

Mr.  Hone's  expressions  were  indeed  lugubrious ;  and 
posterity,  which  would  not  think  of  laughing  at  him,  laughs 
at  them.  For,  even  as  Mr.  Hone  wrote,  the  new  birth  of 
Wall  Street  had  taken  place.  Through  the  labor  of  panic 
and  the  baptism  of  fire,  it  was  now  rapidly  growing  into 
the  stature  and  character  of  to-day.  Wall  Street  soon  be- 
came no  longer  a  mere  street.  Its  name  covered  a  district. 
The  business  of  the  stock-  and  money-markets  began  to  over- 
flow Wall  into  Broad,  New,  and  other  neighboring  streets. 
The  fall  of  the  United  States  Bank  had  brought  to  an  end 
all  pretensions  of  Philadelphia  to  supremacy  in  the  financial 
markets.  In  the  convention  of  bankers  held  in  April,  1838, 
to  consider  the  business  situation,  the  New  York  bankers 
displayed  the  greatest  spirit  and  courage.  The  convention 
decided  to  resume  specie  payments  the  following  January, 
but  the  New  York  banks  resumed  May  Ifi.  "  New  York," 
says  Prof.  W.  G.  Sumner,  writing  of  this  time,  "  adopted 
the  policy  of  severe  contraction,  prompt  liquidation,  and 
speedy  recommencement.  Philadelphia  adopted  that  of 
relaxation,  indulgence,  delay,  and  prolonged  liquidation."  It 


EVOLUTION  OF  WALL  STREET  15 

was  in  1838  also  that  the  State  of  'New  York  abolished 
the  practise  of  special  charters  for  backs,  which  had  given 
rise  to  so  many  scandals  and  abuses,  and  adopted  its  ad- 
mirable free  banking  law,  that  became  the  model  on  which, 
nearly  a  generation  later,  the  National  Banking  Act  was 
drafted.  The  Evening  Post  of  April  18,  1838,  said  in  an 
editorial,  that  this  law  "  puts  up  a  barrier  against  the  prac- 
tise of  banking  by  special  charters  which  we  trust  will 
never  be  removed."  From  this  time  the  financial  suprem- 
acy of  Wall  Street,  in  this  country,  has  never  been  shaken. 
In  1342,  Morse,  who  seven  years  earlier  had  invented 
a  recording  instrument,  built  a  submarine  cable  from  Gov- 
ernors Island  to  the  Battery.  Two  years  later,  in  1844,  the 
first  land  telegraph-line  was  constructed.  Hardly  any  other 
event  has  added  more  to  the  influence  of  Wall  Street.  In 
this  same  year  was  formed  the  law  firm  of  Charles  E.  But- 
ler and  William  M.  Evarts,  which  has  ever  since  been  one 
of  the  notable  institutions  of  the  Street,  and  which  was  one 
of  the  first  of  the  class  of  corporation  law  firms  that  have 
now  become  an  indispensable  part  of  the  Street's  machinery. 
AVith  the  fall  of  the  United  States  Bank  there  was  a  change 
in  the  financial  policy  of  the  Government,  leading,  in  18-46, 
to  the  establishment  of  the  Subtreasury  system  which  ex- 
ists to-day,  although  now  the  foremost  financiers  are  advo- 
cating its  abolition.  The  first  Subtreasury  was  opened  on 
Wall  Street  in  this  year.  In  1853  the  Bank  Clearing-IIouse 
was  organized,  being  first  located  at  Xo.  14  Wall  Street. 
The  Street  should  celebrate  the  semicentennial  of  this  in- 
stitution in  1903  with  enthusiasm,  for  it  has  increased  its 
facilities  and  augmented  its  safeguards  as  has  no  other  part 
of  its  mechanism.  In  the  same  year  the  Assay  Office  was 

t/ 

established  ;  and  the  Corn  Exchange,  the  forerunner  of  the 
present  Produce  Exchange,  was  incorporated. 

The  discovery  of  gold  in  California  and  Australia  in- 
creased the  world's  wealth  so  much  that  there  was  an  im- 
mense expansion  in  investment  and  speculation.     Railroad 
3 


16  THE  WORK  OF   WALL  STREET 

construction  proceeded  at  a  rapid  rate ;  money  poured  into 
the  banks,  and  the  banks  lent  their  credit  to  the  promotion 
of  new  enterprises  and  new  companies.  Instead  of  "an 
utter  destruction  of  American  credit  in  England,"  it  is  com- 
puted that  the  amount  of  American  stocks  held  abroad  in 
1852  represented  a  value  of  $261,000,000. 

At  this  time  the  methods  of  the  Stock  Exchange  were 
primitive  as  compared  with  those  of  to-day.  Each  member 
of  the  Board  had  his  seat,  and  old  cuts  show  that  the  wear- 
ins:  of  tall  hats  was  the  fashion  among  brokers.  Much 

O  " 

business  was  transacted  in  the  Exchange  arid  on  the  curb. 
The  Bankers'  Magazine  of  November  24,  1856,  reported 
that  "the  aggregate  transactions  during  the  past  four  weeks 
were  exceedingly  large,  aggregating  nearly  one  million 
shares." 

But  overspeculation,  following  the  enormous  produc- 
tion of  gold,  and  the  abuses  of  credit  in  the  promotion  of 
new  railroad  and  other  companies,  together  with  tariff  dis- 
turbances, brought  on  the  panic  of  1857,  which  a  writer  of 
the  period  said  was  "  an  explosion  without  adequate  cause 
or  premonition."  This  was  precipitated  by  the  failure  of 
the  Ohio  Life  and  Trust  Company,  a  Cincinnati  concern 
having  a  branch  office  in  Wall  Street.  It  had  made  large 
advances  to  Western  railroads.  A  few  men  still  active  in 
Wall  Street  remember  August  24,  1857,  when  this  institu- 
tion closed  its  doors.  "  The  failure,"  said  the  Herald  of 
that  day,  "  took  the  Street  by  surprise.  While  the  public 
were  looking  for  collapses  among  railroad  companies,  they 
seemed  to  lose  sight  of  banking  institutions."  Two  days 
later  the  Philadelphia  Public  Ledger  said  :  "  The  times  are 
sadly  out  of  joint,  and  the  effects  of  a  bad  system  are  daily 
developing  themselves.  The  banks  have  been  carrying  full 
sail,  the  country  has  been  importing  and  individuals  living 
far  in  advance  of  capital  and  production.""  The  Xew  York 
Times  declared  that  "  the  Xew  York  Stock  Exchange  as  at 
present  managed  is  little  more  than  an  enormous  gambling 


EVOLUTION  OF  WALL  STREET  17 

establishment,"  which  reminds  one  of  some  of  the  indis- 
criminate attacks  made  on  Wall  Street  at  the  present  time. 
All  the  banks,  except  the  Chemical,  suspended  specie  pay- 
ments October  14,  but  resumed  two  months  later.  Wall 
Street  was  shaken  by  the  shock.  From  August  22  to  Oc- 
tober 13,  Reading  declined  40  per  cent,  Delaware  &  Hud- 
son 40,  Illinois  Central  bonds  48,  Park  Bank  stock  44, 
American  Exchange  Bank  55^.  The  size  of  the  stock- 
market  is  shown  by  the  sale  of  nearly  71,000  shares  in 
one  day. 

During  the  whole  period  of  the  civil  wrar  Wall  Street 
was  like  a  boiling  lake  of  excited  speculation.  The  finan- 
cial situation  became  so  strained  that  even  before  Lincoln's 
inauguration  the  bankers  met  at  the  Subtreasury  and  re- 
solved to  suspend  specie  payments.  The  first  issue  of  Clear- 
ing-House  loan  certificates  was  made  at  this  time,  and  from 
1800  to  1864  a  total  of  $59,159,000  were  issued,  the  largest 
amount  outstanding  at  one  time  being  $21,960,OGO  in  1862. 
Before  the  war  was  opened  the  National  debt  was  under  $65,- 
000,000,  but  in  1866  it  amounted  to  $2,773,000,000.  This 
enormous  issue  of  bonds  was  floated  for  the  most  part  in 
Wall  Street,  and  this  was  the  most  extraordinary  of  all  the 
legitimate  achievements  of  the  market.  The  credit  of  the 
country  was  so  low  that  it  was  very  difficult  to  float  the  first 
loan.  The  Chamber  of  Commerce  issued  an  appeal  to  cap- 
italists to  invest  in  the  bonds,  and  Secretary  Chase  visited 
the  Street  and  conferred  with  bankers  in  the  interests  of 
the  loan.  In  the  course  of  the  war  the  Legal-Tender  Act  was 
passed,  and  in  1863  the  present  National  banking  system 
was  established — the  first  National  bank  beino;  founded  in 

o 

June  of  that  year.  To  the  National  Banking  Act,  which 
made  New  York  a  central  reserve  city  where  half  the  re- 
serves of  the  banks  in  the  rest  of  the  country  could  be  kept 
on  deposit,  Wall  Street  owes  no  small  share  of  its  present 
power.  It  has  augmented  vastly  its  financial  resources. 
At  the  outbreak  of  the  war  the  Stock  Board  was  still  a 


18  THE  WORK  OP  WALL  STREET 

close  corporation,  conducting  its  operations  in  secret.  Quo- 
tations were  carried  by  hand  from  office  to  office.  Each 
member  had  a  particular  seat  in  the  Board-Room  ;  there 
were  less  than  a  hundred  members  in  attendance,  and  on 
account  of  persistent  blackballing  it  was  hard  to  get  elected 
to  the  membership.  Speculation  overflowed  the  regular 
Board.  The  curb  market  became  very  active.  An  un- 
official adjunct  to  the  Board  was  started  in  the  next  room, 
and  there  were  extensive  arbitrage  dealings  between  them. 
The  market  opened  on  the  Street  at  eight  o'clock  and  con- 
tinued all  through  the  day  down-town,  and  at  night  in  the 
corridors  of  the  Fifth  Avenue  Hotel,  and  at  a  later  period 
at  an  evening  exchange.  As  the  war  progressed  the  specu- 
lation grew,  and  the  total  sales  from  early  morning  until 
midnight  were  on  an  enormous  scale.  At  this  time  the  rate 
of  commission  was  reduced  from  ^  to  -^  of  1  per  cent.  In 
1865  the  Exchange  prohibited  its  members  from  attending 
the  up-town  night  exchange.  Meanwhile  so  large  was  the 
trading,  and  so  exclusive  the  regular  Exchange,  that  in  1864 
the  Open  Board  of  Brokers  was  organized,  and  continued 
in  existence  until  1869,  when  consolidation  with  the  old 
Board  took  place,  creating  the  present  Stock  Exchange 
with  its  admirable  system  of  government  and  rules  for  the 
transaction  of  business. 

Gold  became  the  football  of  speculation.  The  first 
premium  on  gold  was  quoted  in  January,  1862,  and  it  was 
immediately  dealt  in  the  same  as  stocks.  The  Government 
tried  in  vain  to  prohibit  speculation  in  the  metal.  Specu- 
lation in  gold  was  branded  as  unpatriotic,  but  to  no  purpose. 
Legislation  was  enacted  by  both  the  State  and  the  United 
States  in  1863  to  prohibit  the  banks  from  lending  money 
on  gold  or  bills  of  exchange,  and  in  1864  Congress  pro- 
hibited transactions  in  gold  except  for  strictly  cash  delivery 
at  the  regular  offices  of  those  dealing  in  it.  But  restrictive 
measures  served  only  to  advance  the  premium  and  failed  to 
stop  speculation,  and  the  laws  were  repealed.  In  1864  the 


EVOLUTION  OF  WALL  STREET  19 

Gold  Exchange  was  organized.  The  same  year,  to  facilitate 
deliveries,  the  Bank  of  New  York  arranged  for  special  gold 
deposits,  checks  on  which  became  good  deliveries  for  sales 
of  gold.  Three  years  later  the  Gold  Exchange  Bank  was 
organized  as  the  Clearing-House  for  gold  transactions. 
The  Gold  Exchange  continued  until  1877.  All  speculation 
in  gold  ceased  on  the  resumption  of  specie  payments  in 
1879. 

When  it  is  remembered  that  the  immense  business  trans- 
acted during  the  war  period  was  done  without  the  aid  of 
the  stock-indicator,  the  telephone,  the  cable,  and  the  Stock 
Clearing-House,  there  is  good  cause  for  astonishment. 
Stock-Exchange  records  of  complete  stock  transactions  go 
back  only  to  1875.  Before  that  only  sales  on  calls  were 
reported.  In  1868  the  official  sales  on  call  at  the  two 
Boards  were  19,713,402  shares  of  stocks  and  $245,245,240 
par  value  of  bonds,  but,  according  to  a  contemporary  esti- 
mate, these  sales  only  represented  one-tenth  of  the  total 
speculation  of  the  Street,  which  therefore  amounted  to 
more  than  $20,000,000,000  a  year.  Comparing  this  with 
the  records  of  1901,  when  the  transactions  in  stocks  and 
bonds  aggregated  more  than  $26,000,000,000,*  it  is  seen  that 
speculation  a  generation  ago  was  exceedingly  active. 

It  was  not  until  July,  1866,  that  Cyrus  W.  Field  finally 
succeeded  in  his  cable  enterprise,  and  in  the  following 
month  London  prices  began  to  be  regularly  received  by 
cable  in  Kew  York.  Arbitrage  transactions  soon  started. 
The  next  year  the  stock-indicator  was  adopted.  Telephones 
were  introduced  in  1876.  The  Stock  Clearing-House  was 
established  in  1892,  this  being  undoubtedly  the  most  im- 
portant contribution  to  the  mechanism  of  the  Street  since 
the  organization  of  the  Bank  Clearing-House  forty  years 

*  These  figures  for  1901  represent  the  transactions  of  the  Xew  York 
Stock  Exchange.  The  speculation  in  the  Consolidated  Stock  Exchange, 
on  the  "curb,"  and  in  the  bucket  shops  should  be  added  to  make  the 
comparison  with  1868  more  accurate. 


20  THE  WORK  OP  WALL  STREET 

earlier.     It  lias  expanded  indefinitely  the  facilities  of  the 
stock-market. 

With  the  consolidation  of  the  Stock  Exchange  and  the 
Open  Board  of  Brokers  in  1869,  we  enter  upon  the  history 
of  Wall  Street  practically  as  it  exists  to-day.  Although  a 
full  generation  has  passed,  more  than  one  hundred  and 
thirty  of  the  present  members  of  the  Exchange  were 
elected  in  or  before  that  year.  The  purpose  of  this  book  is 
to  describe  the  present  rather  than  the  past ;  but  since  it  is 
necessary  to  know  something  of  its  history  in  order  to  un- 
derstand the  work  of  Wall  Street,  this  sketch  of  the  begin- 
nings of  its  stock-  and  money-markets  is  given.  But  the 
events  of  the  past  thirty-three  years  can  only  be  touched 
upon  lightly. 

The  theme  is  indeed  a  tempting  one.  The  period  is 
crowded  with  dramatic  episodes.  Mighty  enterprises  have 
been  launched.  Great  deals  have  been  planned.  Enor- 
mous speculations  have  been  carried  on.  Panics  have  con- 
vulsed the  Street.  Immense  fortunes  won  and  lost  have 
startled  the  wrorld.  The  period  immediately  after  the  civil 
war  was  especially  prolific  in  speculative  sensations.  The 
harvest  of  war  was  wild  extravagance,  looseness  of  morals 
in  politics  and  business,  base  frauds,  and  crime.  But  this 
period  was  also  a  time  of  reconstruction.  The  country  put 
its  shoulder  to  the  wheel  of  industry  and  there  was  a  notable 
development  of  the  national  resources.  In  May,  18G9,  the 
first  railroad  train  moved  across  the  continent.  The  At- 
lantic and  the  Pacific  were  united  by  bonds  of  iron.  The 
Transcontinental  stocks  then  became  the  playthings  of 
speculation. 

It  was  in  18G9  that  the  "Gold  Conspiracy"  took  place, 
culminating  in  the  convulsion  of  Black  Friday,  September 
2-t,  which  was  undoubtedly  the  most  extraordinary  day  in 
Wall  Street  history.  A  committee  of  Congress,  of  which 
James  A.  Garfield  was  chairman,  investigated  this  con- 
spiracy, and  its  report  and  accompanying  testimony  consti- 


EVOLUTION  OF   WALL  STREET  21 

tute  the  best  account  of  it.  Jay  Gould,  arguing  that  an  ad- 
vance in  the  premium  on  gold  would  stimulate  exports  of 
wheat  and  thus  benefit  the  farmer,  believed  that  the  Treas- 
ury would  suspend  its  sales  of  gold,  and  this,  in  fact,  was 
for  a  time  the  Treasury  policy.  Therefore  he  got  up  a 
bull  pool  in  gold  and  advanced  the  premium  from  132  to 
144.  Other  members  of  the  pool  liquidated,  leaving  Gould 
and  his  partner,  James  Fisk,  to  carry  on  the  deal.  Gould 
was  assisted  by  the  Tenth  National  Bank,  in  which  he  had 
a  large  interest,  and  which  overcertified  his  checks  $7,500,- 
000  in  one  day.  Garfield  called  this  bank  "  A  Manufactory 
of  Certified  Checks."  There  was  a  bold  and  wicked  attempt 
to  connect  the  Grant  Administration  with  the  conspiracy, 
but  it  did  not  succeed.  The  corner  was  broken  by  Presi- 
dent Grant  and  Secretary  Boutwell,  who  gave  the  order  to 
sell  gold.  Boutwell's  telegram,  "  Sell  four  millions  gold  and 
buy  four  millions  bonds,"  completely  shattered  the  corner. 
"  No  avalanche,"  it  was  said  by  a  writer  of  the  day,  "  ever 
swept  with  more  terrible  violence  than  did  the  news  of  this 
telegram  into  the  Gold  Room."  The  excitement  rose  to  the 
highest  point.  Old  operators  lost  their  heads  and  rushed 
hatless  and  half-crazy  through  the  streets,  their  eyes  blood- 
shot, their  brains  on  fire.  New  Street  was  so  crowded  with 
excited  people  that  it  was  a  dangerous  spot  to  stand  in.  The 
price  of  gold,  which  that  morning  had  risen  to  162£,  fell  to 
133.  The  Gold  Exchange  Bank  could  not  clear  the  gold 
transactions,  which  amounted  to  $410,000,000.  Clearances 
were  suspended  for  a  month,  and  dealings  in  gold  for  a 
week.  Mr.  Gould  employed  over  fifty  brokers  in  his  opera- 
tions. One  of  these  was  Albert  Speyers,  whose  contracts, 
amounting  to  8-°>  7,000,000,  were  repudiated.  Smith,  Gould, 
Martin  &  Company  refused  to  make  out  a  clearance  sheet, 
but  one  was  made  up  for  them  by  a  committee  of  the  Gold 
Exchange,  which  showed  that  they  received  820,030,000 
gold  and  delivered  $7,500,000,  leaving  813,130,000  to  be 
paid  for. 


22  THE  WORK  OP  WALL   STREET 

"  The  malign  influence  which  Catiline  wielded  over  the 
reckless  and  abandoned  youth  of  Rome,"  said  Garfield  in 
his  report,  "  finds  a  fitting  parallel  in  the  power  which  Fisk 
held  in  Wall  Street,  when,  followed  by  the  thugs  of  Erie 
and  the  debauchees  of  the  opera,  he  swept  into  the  Gold 
Room  and  defied  both  the  Street  and  the  Treasury." 

It  was  Black  Friday  that  inspired  E.  C.  Stedman,  the 
banker-poet  of  the  Street,  to  write  his  much-quoted  poem 
beginning : 

"  Zounds  !     How  the  price  went  flashing  through 
Wall  Street,  William,  Broad  Street,  New  ! 
All  the  specie  in  all  the  land 
Held  in  one  Ring  by  a  giant  hand—- 
For millions  now  it  was  ready  to  pay 
And  throttle  the  Street  on  Hangman's  day." 

The  Erie  wars  provided  for  years  the  chief  sensation  of 
Wall  Street.  Erie,  Northern  Pacific,  and  Reading  have 
indeed  been  the  objects  of  more  speculation,  the  cause  of 
more  flurries  and  panic,  and  the  victims  of  more  receiver- 
ships and  reorganizations  than  almost  the  entire  rest  of  the 
railroad  list  put  together.  The  history  of  Erie,  from  the 
time  Daniel  Drew  entered  the  directory  in  1852,  to  the 
time  when  by  main  force  Gould  was  driven  from  the  Presi- 
dency in  1872,  would  make  a  volume  of  absorbing  interest. 
Charles  Francis  Adams  made  it  the  theme  of  two  brilliant 
magazine  articles  soon  after  the  events  happened.  Drew 
was  in  control  of  the  road  until  18G8.  For  years  Commo- 
dore Yanderbilt,  who  had  obtained  control  of  the  Harlem, 
the  Hudson,  and  the  Xew  York  Central  Railroads,  fought 
desperately  with  Drew  in  the  Legislature,  the  courts,  and 
the  stock-market  for  the  mastery  of  Erie.  In  1808  Drew 
lost,  but  Yanderbilt  did  not  gain,  control.  The  road  then 
passed  into  the  hands  of  Gould,  who  for  four  years  made  it 
the  plaything  of  his  Wall  Street  operations. 

"•  Freebooters,"  wrote  Mr.  Adams,  "  are  not  extinct. 
Gambling  is  a  business  now  where  formerly  it  was  a  dis- 


EVOLUTION  OP  WALL  STREET  23 

reputable  excitement.  Cheating  at  cards  was  always  dis- 
graceful. Transactions  of  a  similar  nature,  under  the 
euphemistic  names  of  operating,  cornering,  and  the  like, 
are  not  so  regarded."  During  these  twenty  years  of  poor 
Erie's  history  securities  were  issued  by  the  bushel,  legis- 
lative bribery  was  freely  resorted  to,  law  was  made  another 
name  for  plunder,  legal  pandemonium  existed,  the  courts 
ran  riot.  Injunctions  and  counter  injunctions  were  issued. 
In  the  final  uprising  of  the  people  that  followed  this  period 
of  rottenness  in  politics  and  business,  two  corrupt  judges 
were  driven  from  the  bench.  The  Drew  trick  of  issuing 
new  stock  and  flooding  the  market  with  it,  and  then  by 
various  expedients  preventing  its  transfer  on  the  books,  so 
as  still  to  keep  control  of  the  property,  was  copied  by  Gould, 
a  greater  master  of  speculation  than  even  he.  "  This,"  said 
Adams,  "  is  the  most  extraordinary  feat  of  financial  leger- 
demain which  history  has  yet  recorded."  The  Stock  Ex- 
change finally  made  a  rule  requiring  shares  of  companies  to 
be  registered,  in  order  to  prevent  a  repetition  of  this  scan- 
dal, but  Gould  at  first  refused  to  comply  with  it,  and  Erie 
was  for  a  time  struck  from  the  list.  After  Mr.  Gould  was 
driven  from  the  Presidency  under  a  revolt  inspired  chiefly 
by  English  stockholders,  he  was  sued  for  $9,700,000,  which 
it  was  claimed  he  had  converted  to  his  own  use  from  the 
assets  of  the  road.  Mr.  Gould  was  under  arrest  for  a  short 
time,  and  finally  made  his  famous  "restitution,"  turning 
over,  besides  some  valuable  real  estate,  securities  nominally 
worth  $0,000,000,  but  which,  it  was  later  related  under  oath 
to  the  Hepburn  Railroad  Committee,  were  not  really  worth 
over  $200,000. 

General  Grant  said,  in  1869,  that  he  thought  there  was  a 
"  fictitiousness  about  the  prosperity  of  the  country,"  and  he 
was  right ;  but  the  collapse  did  not  come  until  four  years 
later.  The  panic  of  18T3  was  precipitated  by  the  failure 
of  Jay  Cooke,  the  promoter  of  the  ^Northern  Pacific,  and  it 
caused  the  greatest  distress  throughout  the  country.  Its 


24  THE   WORK  OP   WALL  STREET 

severity  in  Wall  Street  is  shown  by  the  fact  that  the  Stock 
Exchange  closed  its  doors  for  ten  days,  and  that  there  were 
seventy-nine  stock  failures.  A  long  period  of  stagnation 
succeeded,  but  in  1879  the  memorable  boom  that  followed 
the  resumption  of  specie  payments  was  in  full  swing,  and 
was  checked  only  by  the  assassination  of  Garfield  in  1881. 
Wall  Street  suffered  most  from  the  panic  of  1884,  although 
its  effects  were  to  a  considerable  extent  felt  throughout  the 
country.  This  started  with  the  failure  of  Grant  &  Ward 
and  the  Marine  Bank,  due  to  the  dishonesty  of  Ferdinand 
Ward,  the  partner  of  General  Grant.  These  were  followed 
a  few  days  later  by  the  suspension  of  the  Metropolitan  Bank 
and  George  I.  Seney.  A  remarkable  incident  of  this  panic 
was  the  failure  of  A.  S.  Hatch,  then  President  of  the  Stock 
Exchange.  A  special  election  to  fill  Mr.  Hatch's  place 
had  to  be  held  in  the  midst  of  the  excitement,  resulting  in 
the  selection  of  J.  Edward  Simmons,  who  piloted  the  Ex- 
change through  the  ensuing  months  of  severe  strain. 

In  1890  a  world- wide  blow  to  credit  was  caused  by  the 
suspension  of  the  Barings,  of  London,  a  blow  more  disas- 
trous even  than  that  of  the  failure  of  Overend,  Gurney  & 
Co.  in  1806.  There  was  a  year  of  prosperity  in  1892,  but 
the  next  year  the  last  commercial  panic  set  in  as  the  result 
of  the  free  silver  agitation. 

In  the  stock-market,  the  first  notable  event  of  1893  was 
the  collapse  of  the  McLeod  Reading  combination.  This 
had  been  formed  in  1892,  and  on  the  llth  of  February  of 
that  year  there  had  been  a  bull  day  in  Reading  which  ad- 
vanced to  05,  with  sales  of  592,000  shares,  the  total  trans- 
actions of  all  stocks  reaching  1,440,915  shares,  which  for 
nearly  seven  years  remained  the  "record"  for  one  day's 
trading.  But  February  20,  1893,  the  combination  went  to 
pieces;  Reading  fell  to  28  J,  and  the  day's  sales  amounted 
to  1,438,971  shares,  of  which  957,955  were  Reading.  On 
May  3  there  was  a  heavy  fall  of  stock  prices,  and  the  next 
day  the  collapse  in  Cordage  caused  three  failures. 


EVOLUTION  OP  WALL  STREET  25 

The  events  of  the  panic  of  1893  are,  however,  too  recent 
to  require  recapitulation,  though  it  will  pay  some  future 
historian  to  make  them  the  subject  of  careful  study.  For 
many  months  the  Treasury  was  on  the  ragged  edge  of  sus- 
pension of  gold  payments.  The  National  debt  had  to  be 
increased  in  order  to  buy  gold.  Europe  dumped  her  heavy 
load  of  American  securities  on  our  market.  Prices  of  all 
stocks  collapsed  like  houses  of  cards.  Thirteen  stock-ex- 
change houses  suspended,  and  there  were  more  than  15,000 
commercial  failures.  Only  the  Clearing-IIouse  Loan  Com- 
mittee, composed  of  Frederick  D.  Tappen,  E.  II.  Perkins, 
Jr.,  J.  Edward  Simmons,  Henry  W.  Cannon,  "W.  A.  Nash, 
and  G.  G.  Williams  stood  between  the  business  of  the  coun- 
try and  universal. bankruptcy.  AVall  Street  never  performed 
a  more  valuable  service  for  the  country. 

President  Cleveland's  so-called  Venezuelan  message  pro- 
duced the  Wall  Street  upheaval  of  December,  1895.  Still 
suffering  from  the  strain  of  the  silver  problem,  with  heavy 
exports  of  gold,  the  continued  depletion  of  the  Treasury 
reserve,  making  necessary  another  bond  issue,  the  market 
broke  under  the  added  burden  of  possibility  of  war  with 
England,  which  happily  was  avoided. 

The  election  of  1896,  resulting  in  a  victory  for  the  gold 
standard,  ended  the  four  years  of  depression  in  business, 
and  the  five  years  of  what  is  known  as  the  McKinley  boom 
began.  Confidence  was  restored,  the  crops  were  bountiful, 
the  gold  production  was  unprecedented,  and  marvelous 
prosperity  filled  the  land.  Even  the  Trans-Missouri  deci- 
sion of  March  22,  1*97,  which  declared  that  railroad  pooling 
was  illegal,  only  temporarily  checked  the  revival,  although 
it  has  since  worked  great  changes  in  methods  of  railroad 
control,  introducing  "  communities  of  interests,"  and  hold- 
ing or  securities  companies,  with  the  possibility  of  still 
more  important  changes  in  the  future.  The  war  with 
Spain,  short  and  decisive,  and  bringing  about  the  acquisi- 
tion of  the  Philippines,  actually  augmented  the  boom  ;  but 


26  THE   WORK  OP   WALL  STREET 

in  1899  there  was  a  reaction  caused,  first  by  ex-Governor 
Flower's  sudden  death,  and  later  by  the  Boer  War  and  the 
closing  of  the  Transvaal  mines.  The  passage  of  the  Gold 
Standard  Law  of  1900  was  the  legitimate  consequence  of 
the  verdict  of  the  people  rendered  four  years  before,  and 
which  was  confirmed  by  the  reelection  of  McKinley.  All 
records  of  bank  clearings,  stock  and  bond  transactions,  ex- 
ports, manufactured  productions  and  volume  of  trade,  were 
broken  in  1901.  The  high-water  mark  both  of  Wall  Street 
speculation  and  business  prosperity  was  then  reached.  A 
strike  of  steel  operators,  a  short  corn  crop,  the  contest  for  the 
control  of  the  Northern  Pacific,  ending  in  the  stock  panic  of 
May  9,  and  the  assassination  of  McKinley,  any  one  of  which, 
under  other  and  ordinary  conditions,  might  have  spelled 
National  disaster,  did  not  materially  disturb  business  in- 
terests, and  only  partially  reduced  the  volume  of  specu- 
lation. 

New  giants  had  appeared  in  the  speculative  arena  during 
this  boom — men  of  daring,  of  originality,  and  of  that  gift 
of  imagination  which  is  as  essential  to  the  highest  success 
in  finance  as  it  is  in  art,  music,  and  literature.  An  era 
of  big  things  opened  for  Wall  Street.  Great  industrial 
companies  were  formed.  Practically  every  large  business 
•was  incorporated.  The  billion-dollar  steel  corporation  was 
organized.  Ten  million -dollar  banks  were  created.  Ameri- 
can capital  began  to  show  signs  of  eagerness  for  other 
worlds  to  conquer,  and  stretched  its  hands  across  the  sea. 

In  this  bird's-eye  view  of  the  evolution  of  Wall  Street 
little  notice  has  been  taken  of  persons.  It  would  be  pleas- 
ant, if  space  permitted,  to  retrace  the  footsteps  of  Alex- 
ander Hamilton  in  the  Street,  and  note  the  stir  made  by 
the  frequent  visits  of  Nicholas  Biddle.  How  delightful 
must  have  been  those  evenings  spent  by  the  bankers  and 
brokers  of  eighty  years  ago  in  Baker's  Hotel,  in  Wall  near 
New  Street,  at  the  meetings  of  the  social  organization 
called  "  The  House  of  Lords,"  of  which  Bernard  Hart  was 


EVOLUTION  OF  WALL  STREET  27 

President !     Many  an  important   deal  was   discussed  and 
arranged  there. 

Across  the  broad  stage  of  Wall  Street  has  passed  a  long 
procession  of  notable  men ;  men  of  achievement  as  well  as 
men  of  destruction ;  men  who  have  added  to  the  wealth 
and  happiness  of  the  country,  and  men  whose  only  claim 
to  fame  was  the  audacity  of  their  operations.  In  1820  Na- 
thaniel Prime  and  John  Ward  appear  to  have  been  the 
most  active  Wall  Street  speculators.  Jacob  Barker,  the 
early  Rothschild  of  the  market ;  Jacob  Little,  the  first  of 
the  long  line  of  "  Napoleons  of  Wall  Street,"  who  made  and 
lost  nine  fortunes,  and  was  the  first  to  invent  the  converti- 
ble bond  trick  ;  Simeon  Draper,  whose  death  in  1853  caused 
a  flurry ;  Daniel  Drew,  the  great  speculative  director ; 
Commodore  Vanderbilt,  creator  of  the  New  York  Central 
Railroad  system ;  his  son,  William  H.  Vanderbilt,  whose 
sudden  death,  while  conferring  with  Robert  Garrett,  caused 
much  excitement  in  financial  circles ;  Jay  Gould,  both 
builder  and  wrecker  of  values,  at  once  bold  and  conserva- 
tive, and  at  all  times  subtle,  adroit,  and  able  ;  James  Fisk, 
whose  sensational  career  had  a  sensational  ending  in  his 
murder  by  Stokes ;  Russell  Sage,  for  years  the  Street's 
largest  individual  money-lender,  and  a  factor  in  corpora- 
tions and  speculations  for  half  a  century ;  David  Dow, 
Cyrus  W.  Field,  Horace  F.  Clark,  William  S.  Woodward, 
Alexander  Mitchell,  William  II.  Marsten,  Anthony  W. 
Morse,  Leonard  Jerome,  and  William  R.  Travers,  the  wit 
of  the  Street ;  Henry  Clews,  the  veteran,  who  has  em- 
bodied his  experiences  of  forty  years  in  two  volumes  of 
reminiscences ;  Jay  Cooke,  the  first  promoter  of  the  North- 
ern Pacific,  who  lived  to  see  his  dreams  of  its  future  great- 
ness realized  ;  Henry  Yillard,  who  completed  the  road  by 
driving  "  the  golden  spike,"  and  who  organized  the  first  big 
"  P>lind  Pool "  ;  George  I.  Seney,  who  promoted  the  "  Nick- 
el Plate,"  and  astonished  the  Street  with  the  way  in  which 
he  watered  its  stock  and  succeeded  in  unloading  the  prop- 


28  THE  WORK  OF  WALL  STREET 

erty  on  the  Vanderbilts ;  Addison  Cammack  and  Charles 
F.  Woerishoffer,  long  the  most  noted  bears  of  the  stock- 
market  ;  Henry  N.  Smith,  once  partner  but  later  the  rival 
and  enemy  of  Gould ;  William  Heath,  who  went  down  in 
Smith's  failure ;  S.  Y.  White,  astronomer  and  lawyer  as 
well  as  broker,  and  once  the  noted  manipulator  of  Lacka- 
wanna ;  James  R.  Keene,  who  has  long  held  a  unique  place 
in  the  stock-market  as  the  skilful  manager  of  colossal  oper- 
ations for  himself  and  for  syndicates ;  Francis  L.  Eames, 
President  and  historian  of  the  Exchange,  and  founder  of 
its  Clearing-House ;  J.  Edward  Simmons,  the  only  man 
who  has  served  as  President  both  of  the  Stock  Exchange 
and  the  Bank  Clearing-House;  W.  R.  Vermilye,  Donald 
Mackay,  and  Washington  E.  Connor ;  F.  D.  Tappen,  the 
banker  who  took  the  helm  in  time  of  panic  and  piloted  the 
ship  of  finance  through  the  storm  to  a  port  of  safety  ;  R.  P. 
Flower,  the  first  leader  in  the  McKinley  boom  ;  August 
Belmont,  George  J.  Gould,  W.  K.  Yanderbilt,  George  F. 
Baker,  James  Stillman,  Henry  W.  Cannon,  John  D.  Rocke- 
feller, William  Rockefeller,  H.  H.  Rogers,  E.  H.  Harriman, 
Jacob  II.  Schiif,  and  last,  and  perhaps  the  greatest,  J.  Pier- 
pont  Morgan,  the  only  man  who  has  ever  carried  to  success- 
ful consummation  a  billion-dollar  enterprise — these  are  some 
of  the  names  that  have  made  Wall  Street  famous. 

During  the  past  thirty  years  the  architecture  of  the 
financial  district  has  undergone  a  metamorphosis.  Old 
structures  have  been  torn  down  and  new  and  towering 
buildings  have  taken  their  place,  so  that  there  is  now  little 
left  as  a  reminder  of  the  past  except  Trinity  Church,  the 
Subtreasury,  and  the  Custom-IIouse,  and  even  the  last  is 
soon  to  undergo  a  change. 

Accompanying  this  transformation  in  the  outward  form 
of  Wall  Street  there  has  been  a  like  change  in  its  inner  life 
and  spirit.  A  notable  expansion  and  improvement  in  its 
facilities  has  taken  place.  The  methods  of  the  stock-market 
have  been  modernized.  Greater  safeguards  against  reckless 

o  o 


EVOLUTION  OF  WALL  STREET  29 

and  dishonest  speculation  have  been  adopted.  Kew  barriers 
have  been  raised  against  the  ravages  of  panic.  Specula- 
tion is  at  once  bolder  and  better  protected.  The  banks 
have  increased  their  capital,  augmented  their  resources,  and 
by  combination  are  able  to  present  a  solid  front  against  the 
approach  of  disaster.  What  the  future  has  in  store  no  one 
can  tell.  Human  nature  changes  slowly  from  century  to 
century.  There  has  been  much  even  in  recent  conditions 
to  remind  one  of  the  South  Sea  and  Mississippi  bubbles  of 
two  hundred  years  ago.  The  stock-market  will  no  doubt 
continue  to  present  the  same  strange  contrasts  of  panics 
and  booms,  of  intelligent  investment  and  reckless  specula- 
tion, of  construction  and  of  wrecking,  of  splendid  achieve- 
ment and  of  scandalous  dishonesty.  But  unless  the  expe- 
rience of  the  nineteenth  century  has  gone  for  naught,  "\Yall 
Street  in  the  twentieth  century  will  show  forth  far  more  of 
glory  than  of  shame. 


CHAPTER  II 

GENERAL   VIEW    OF   WALL    STREET 

MORE  than  a  century  ago  the  volume  of  Wall  Street's 
business  was  easily  computed  in  thousands.  Later  its  trans- 
actions were  in  millions.  To-day  any  sketch  of  the  work 
of  Wall  Street  must  necessarily  be  a  study  in  billions.  Even 
the  sum  of  $50,000  paid  out  of  the  Treasury  in  1792  by 
Hamilton  was  sufficient  to  afford  some  relief  to  the  Street 
in  a  time  of  financial  distress.  It  would  be  but  a  drop  in 
the  bucket  to-day.  In  March,  1D02,  J.  Pierpont  Morgan, 
testifying  in  the  Northern  Securities  case,  spoke  of  a  $10,- 
000,000  deal  as  if  it  were  a  small  matter. 

The  boundaries  of  the  financial  district  are  not  clearly 
defined.  The  term  Wall  Street,  in  its  narrowest  meaning, 
refers  to  one  of  the  shortest  streets  in  New  York,  extending 
from  Broadway  to  the  East  River,  only  that  part  west  of 
Pearl  Street  being  occupied  by  bankers  and  brokers.  But 
in  its  widest  signification  it  stands  for  the  money  and  stock- 
markets,  for  banking  and  speculation,  for  national  and  in- 
ternational finance.  As  most  commonly  used,  the  name  ap- 
plies to  a  certain  section  of  the  city  where  the  banks  and 
the  exchanges  and  the  offices  of  the  corporations  which  de- 
pend upon  them  are  located.  The  offices  of  the  Trustees 
of  Columbia  University  and  of  the  excellent  Seamen's 
Friend  Society  are  in  Wall  Street,  but  are  far  less  of  it 
than  are  many  institutions  that  are  located  far  away — as, 
for  instance,  the  Chemical  Bank,  facing  the  City  Hall,  the 
general  offices  of  the  New  York  Central  Railroad,  at  Forty- 
second  Street,  and  the  corridors  of  the  Waldorf-Astoria 
30 


Co^b'rc0/!    f       I 


L 


Map  of  Wall  Street  district. 


32  THE  WORK  OF  WALL  STREET 

Hotel,  where  the  brokers  and  operators  are  wont  to  con- 
gregate in  the  evening,  as  in  former  years  they  assembled 
at  the  Fifth  Avenue  Hotel,  and  later  at  the  Windsor. 

A  man  is  said  to  be  in  Wall  Street  who  is  engaged  in 
business  and  speculation  directly  connected  with  the  great 
exchanges  and  banks,  and  the  banking-houses  and  corpo- 
rations in  close  affiliation  with  them.  The  telegraph  has 
vastly  extended  the  boundaries  of  the  financial  district,  arid 
the  brokers'  branch  offices,  with  direct  wire  connections, 
are  to  be  found  in  many  cities  and  towns. 

Draw  a  line  east  and  west  from  river  to  river  across 
Manhattan  Island,  along  the  line  of  Fulton  Street,  and  the 
territory  south  of  it  comprises  the  financial  center.  The 
city  is  only  three-quarters  of  a  mile  wide  at  Fulton  Street, 
which  is  only  half  a  mile  from  the  Battery ;  yet  within 
this  narrow  district  is  concentrated  more  wealth,  probably, 
than  in  any  other  like  area  in  the  world.  The  Stock  Ex- 
change stands  in  about  the  center,  on  Broad  and  New  Streets, 
with  a  narrow  wing  facing  on  Wall  Street.  The  Bank 
Clearing-House  occupies  a  stately  building  on  Cedar  Street, 
between  Broadway  and  Nassau  Street.  The  Subtreasury 
stands  on  Wall  at  the  corner  of  Nassau,  facing  Broad 
Street,  and  the  Assay  Office  occupies  the  old  building  ad- 
joining on  Wall.  The  Custorn-IIouse,  through  which  one- 
half  of  the  commerce  of  the  United  States  passes,  has  its 
home  in  the  old  Merchants'  Exchange  building  on  Wall 
Street,  corner  of  William,  but  is  to  move  in  a  year  or  two 
to  the  new  structure  now  building  at  Bowling  Green.  Near 
the  site  of  the  new  Custom-IIouse,  at  the  corner  of  Beaver 
Street,  stands  the  immense  Produce  Exchange  building, 
occupying  the  ground  where  formerly  was  the  first  market 
of  the  old  Dutch  city.  The  Produce  Exchange  is  devoted 
to  transactions  in  grains  and  provisions.  The  building  also 
includes  the  Maritime  Exchange,  which,  as  its  name  im- 
plies, is  the  meeting-place  of  ship-brokers  and  others  en- 
gaged in  the  shipping  trade,  and  which  is  soon  to  move 


GENERAL   VIEW  OF  WALL  STREET  33 

into  a  home  of  its  own  in  Broad  Street.  During  the 
rebuilding  of  the  Stock  Exchange  the  Stock  Board  has  for 
more  than  a  year  occupied  a  part  of  the  big  Exchange 
room  of  the  Produce  Exchange.  The  Cotton  Exchange, 
founded  in  1870,  and  the  largest  institution  of  the  kind  in 
this  country,  has  a  fine  building  at  Hanover  Square,  on  the 
site  where  Bradford  printed  the  first  newspaper  published 
in  New  York.  Close  to  the  Cotton  Exchange  stands  the 
Coffee  Exchange.  On  Pearl,  at  the  corner  of  John  Street, 
is  the  Metal  Exchange.  On  Broadway,  in  the  Trinity 
Building,  is  the  Real  Estate  Exchange  Salesroom,  which  is 
the  headquarters  of  the  real  estate  trade.  In  the  settlement 
of  estates  many  investment  securities  are  also  sold  there  at 
auction.  Farther  down  Broadway,  on  the  corner  of  Ex- 
change Place,  stands  the  Consolidated  Stock  and  Petroleum 
Exchange,  where  formerly  there  was  a  heavy  speculation  in 
oil,  but  which  now  does  a  large  business  in  stocks,  mostly 
in  lots  smaller  than  those  traded  in  at  the  Stock  Exchange. 

The  sugar  trade  monopolizes  a  large  part  of  the  lower 
end  of  Wall  Street.  In  Pearl  Street  is  concentrated  a  sec- 
tion of  the  tobacco  trade.  The  metal  trade  gathers  around 
the  Metal  Exchange,  the  cotton  trade  in  and  around  the 
Cotton  Exchange,  and  the  grain  trade  in  and  around  the 
Produce  Exchange.  The  steamship  and  express  companies 
are  found  on  Broadway,  below  Wall  Street.  The  fire  and 
marine  insurance  companies  center  in  Wall,  Pine,  and  Cedar 
Streets.  Several  of  the  life  insurance  companies,  includ- 
ing the  two  largest,  whose  combined  assets  amount  to  nearly 
$700,000,000,  are  also  in  this  district.  The  Standard  Oil 
Company  has  its  headquarters  in  a  building  of  its  own  in 
lower  Broadway,  and  the  Western  Union  Telegraph  Com- 
pany in  a  building  at  the  corner  of  Dey  Street. 

In  this  financial  district  there  are  35  National  and  State 
banks,  of  which  12  are  in  Wall  Street ;  29  trust  companies, 
of  which  10  are  in  Wall  Street ;  the  general  or  principal 
fiscal  offices  of  52  railroad  corporations ;  IS  life,  46  fire  and 


34  THE   WOEK  OF   WALL  STREET 

marine,  and  22  other  insurance  companies ;  9  safe-deposit 
companies ;  6  express,  21  telegraph,  and  18  steamship  com- 
panies ;  42  coal,  iron,  steel,  and  copper  companies ;  and  of 
more  than  200  large  industrial,  manufacturing,  and  other 
miscellaneous  corporations.  Every  company  whose  securi- 
ties are  listed  in  the  Stock  Exchange  has  a  transfer  office 
within  convenient  distance  of  it.  The  brokers  make  their 
headquarters  in  the  towering  office  buildings,  those  wonder- 
ful structures  of  steel  clothed  in  stone  and  marble,  which 
have  made  the  streets  in  the  financial  district  a  series  of 
deep  canons.  One  of  these  buildings  on  Broad  Street  and 
Exchange  Place  is  said  to  contain  more  rooms  than  any 
other  in  the  world.  The  private  bankers,  of  course,  have 
their  elaborate  establishments  within  this  district.  The 
house  of  J.  P.  Morgan  &  Company  occupies  the  Drexel 
Building,  at  the  corner  of  Wall  and  Broad  Streets,  which 
has  the  reputation  of  standing  on  the  most  valuable  site  per 
square  foot  of  any  real  estate  in  Kew  York.  The  curb 
market  has  been  situated  on  Broad,  between  the  Mills  Build- 
ing and  the  Commercial  Cable  Building,  close  to  the  Stock 
Exchange,  but  is  obliged  from  time  to  time  to  shift  its 
position. 

Object  alike  of  fascination  and  fear,  Wall  Street  is  the 
best  known  and  least  understood  street  in  America ;  object 
of  fascination,  because  of  the  glamour  of  the  great  fortunes 
made  and  lost  there ;  object  of  fear,  because  of  its  wealth 
and  power.  It  is  as  mysterious  to  the  outsider  as  a  Masonic 
Lodge  is  to  one  who  has  never  passed  through  its  cere- 
monies of  initiation.  Like  Masonry,  Wall  Street  has  its 
code  of  morals,  its  ritual  or  forms  of  doing  business,  its 
working  tools,  and  a  strange  language  which  only  the  in- 
itiated can  understand.  Moreover,  no  Masonic  Lodge  is 
ever  tiled  more  closely  than  is  Wall  Street,  where,  notwith- 
standing its  immense  deposits  of  money  and  valuable  se- 
curities, robbery  is  seldom  attempted  and  still  more  rarely 
accomplished,  so  carefully  is  it  policed. 


GENERAL  VIEW  OF  WALL  STREET  35 

It  will  be  found  that  the  nearer  we  get  to  the  mysteries 
of  Wall  Street  the  less  mysterious  they  appear.  In  truth, 
strange  as  may  seem  some  of  its  terms  and  methods,  noth- 
ing could  be  more  direct  or  simple  than  the  principles  upon 
which  it  conducts  its  business. 

"Wall  Street  is  to  the  United  States  what  Capel  Court 
and  Threadneedle,  Throgmorton,  and  Lombard  Streets  are 
to  England,  the  seats  of  the  stock  and  money  markets ; 
but  they  are  international  in  their  scope  and  power.  Wall 
Street's  stock-market  is  national.  London  is  the  Clearing- 
Ilouse  of  the  world.  New  York  is  the  Clearing-llouse  of 
one-half  of  the  world.  The  bonds  of  every  Government, 
the  stocks  of  every  country,  are  traded  in  in  London. 
Wall  Street  confines  itself  to  the  securities  of  the  United 
States.  So  rich,  however,  is  this  country,  so  extensive 
its  territory  and  so  immense  and  varied  its  resources,  that 
there  is  little  need  as  yet  for  our  capitalists  to  go  outside 
to  find  fields  for  investment,  though  they  are  beginning 
to  do  so.  The  scope  of  Wall  Street  business  is  much  less 
than  London^  but  its  volume  is  nearly  equal.  Moreover,  its 
power  is  now  recognized  the  world  over  as  second  only  to 
that  of  London.  In  the  past  four  years  several  foreign 
loans  have  been  floated  here.  British  consols,  German  Gov- 
ernment bonds,  the  city  bonds  of  Copenhagen,  Vienna,  Mu- 
nich, and  Augsburg,  have  found  a  market  in  Wall  Street. 
Here  have  been  financed  the  requirements  of  Mexico ;  and 
even  Russia  has  sought  the  assistance  of  American  capital. 
The  expansion  of  American  territory  brings  the  Philippines 
within  the  scope  of  Wall  Street  finance.  Dewey's  guns  at 
Manila  were  heard  around  the  world.  American  manu- 
facturers are  competing  for  trade  in  every  market.  Amer- 
ican capital  is  employing  itself  in  Canada  and  South  Amer- 
ica, has  invaded  London  and  Rotterdam,  and  is  gradually 
spreading  itself  over  Europe  and  Asia.  The  time  can  not 
be  far  distant,  therefore,  when  the  securities  of  the  world 
will  be  represented  in  the  markets  of  Wall  Street  as  they 


36  THE   WORK  OP   WALL  STREET 

are  now  in  London.  Even  now  it  is  proposed  to  list  cer- 
tificates representing  British  consols.  "  The  debtor  nation," 
said  Secretary  of  State  Hay  in  his  McKinley  memorial 
address,  "  has  become  the  chief  creditor  nation.  The  finan- 
cial center  of  the  world,  which  required  thousands  of  years 
to  journey  from  the  Euphrates  to  the  Thames  and  the 
Seine,  seems  passing  to  the  Hudson  between  daybreak  and 
dark." 


CHAPTER  III 

THE    STOCK- MAKKET 

Two  questions  confront  us  at  the  threshold  of  this  sub- 
ject: 

1.  "What  is  a  stock-market  ? 

2.  ~\Vh y  is  there  a  stock-market  ? 

An  answer  to  one  is  practically  an  answer  to  the  other. 

A  stock-market  is  an  income  market.  It  is  a  place 
where  incomes  are  bought  and  sold.  Ko  one,  it  is  true, 
goes  to  the  Stock  Exchange  as  he  might  to  an  insurance 
company,  and,  paying  over  the  requisite  amount  of  money, 
buys  an  annuity.  Yet,  essentially,  the  stock-market  opera- 
tion is  the  same.  The  stocks  and  bonds  traded  in  on  the 
Stock  Exchange  would  be  worthless  unless  they  represented 
value  either  present  or  prospective.  Bonds  and  preferred 
stock  generally  represent  fixed  income.  Common  stocks 
represent  speculative  income — that  is,  income  that  may  vary 
from  year  to  year,  according  to  the  earning  capacity  of  the 
corporations  issuing  them.  If  a  company  has  no  income 
and  no  prospect  of  earning  one,  its  securities  are  worth  no 
more  than  so  much  waste  paper.  It  is  true  that  the  stocks 
of  an  insolvent  company  are  often  quoted  in  the  market, 
but  their  value  consists  in  the  control  of  the  charter,  the 
franchise,  or  some  other  privilege  from  which  it  is  believed 
an  income  may  some  time  be  derived.  Several  months  ago 
a  list  of  48  non-dividend-paying  stocks  was  published  whose 
average  market  price  was  41,  but  every  one  enjoyed  the 
prospect,  immediate  or  remote,  of  future  dividends.  There 
would  be  no  stock-market  if  there  were  no  incomes. 

37 


38  THE  WORK  OF  WALL  STREET 

In  Paris  an  investor  will  say  to  his  broker,  "  Buy  me 
enough  rentes  to  pay  me  an  income  of,  say,  50,000  francs  a 
year."  lie  goes  into  the  market  to  buy  not  rentes,  but  in- 
come. In  New  York  the  investor  does  not  express  himself 
so  directly.  He  says  to  his  broker,  "  Buy  me  $500,000  of 
bonds."  Now,  what  he  is  actually  buying  is  not  bonds,  but 
the  income  the  bonds  will  yield.  Before  placing  the  order 
he  has  calculated  exactly  what  will  be  the  income,  taking 
into  account  the  premium  paid,  the  interest  promised,  and 
the  duration  of  the  bond.  All  investments  are  thus  made 
on  the  income  basis. 

The  stock-market,  therefore,  rests  upon  a  sound  eco- 
nomic basis.  In  telling  what  it  is  we  have  indicated  clearly 
why  it  is.  Writing  of  the  beginnings  of  the  English  stock- 
market  more  than  two  centuries  ago,  Macaulay  says  : 

"  During  the  interval  between  the  Restoration  and  the 
Revolution  the  riches  of  the  nation  had  been  rapidly  in- 
creasing. Thousands  of  busy  men  found  every  Christmas 
that  after  the  expenses  of  the  year's  housekeeping  had  been 
defrayed  out  of  the  year's  income  a  surplus  remained ;  and 
how  that  surplus  was  to  be  employed  was  a  question  of  some 
difficulty.  In  our  time,  to  invest  such  a  surplus  at  some- 
thing more  than  3  per  cent  on  the  best  security  that  has 
ever  been  known  in  the  world  is  the  work  of  a  few  minutes. 
But  in  the  seventeenth  century  a  lawyer,  a  physician,  or  re- 
tired merchant,  who  had  saved  some  thousands  and  who 
wished  to  place  them  safely  and  profitably,  was  often  greatly 
embarrassed.  Three  generations  earlier,  a  man  who  had 
accumulated  wealth  in  a  profession  generally  purchased 
real  property  or  lent  his  savings  on  mortgage.  But  the 
number  of  acres  in  the  Kingdom  had  remained  the  same, 
and  the  value  of  those  acres,  though  it  had  greatly  increased, 
had  by  no  means  increased  as  fast  as  the  quantity  of  capital 
seeking  for  employment.  Many,  too,  wished  to  put  their 
money  where  they  could  find  it  at  an  hour's  notice,  and 
looked  about  for  some  species  of  property  which  could  be 


THE  STOCK-MARKET  39 

more  readily  transferred  than  a  house  or  a  field.  There 
were  a  few  joint-stock  companies,  among  which  the  East 
India  Company  held  the  foremost  place;  but  the  demand 
for  the  stock  of  such  companies  was  far  greater  than  the 
supply.  Indeed,  the  cry  for  a  new  East  India  Company 
was  chiefly  raised  by  persons  who  found  difficulty  in  placing 
their  savings  at  interest  on  good  security.  So  great  was 
that  difficulty  that  the  practise  of  hoarding  was  common." 

Where  there  is  a  demand  a  supply  is  usually  found. 
Out  of  this  condition  of  things  grew  the  English  stock- 
market,  and  by  1688  stock-jobbing  was  in  full  swing  in 
London.  Macaulay  goes  on  to  describe  the  output  of  new 
companies  at  this  period.  A  crowd  of  projectors,  ingenious 
and  absurd,  honest  and  knavish,  employed  themselves  in  de- 
vising new  schemes  for  the  employment  of  redundant  capi- 
tal. Some  of  the  companies  took  large  mansions  and 
printed  their  advertisements  in  gilded  letters.  Jonathan's 
and  Garroway's  were  in  a  constant  ferment  with  brokers, 
buyers,  sellers,  and  meetings  of  directors.  Extensive  com- 
binations were  formed,  and  monstrous  fables  were  circulated 
for  the  purpose  of  raising  or  depressing  the  prices  of  shares. 
"An  impatience  to  be  rich,"  he  added,  "a  contempt  for 
those  slow  but  sure  gains  which  are  the  proper  reward  of 
industry,  patience,  and  thrift,  spread  through  society.  It 
was  much  easier  and  much  more  lucrative  to  put  forth  a 
lying  prospectus  announcing  a  new  stock,  to  persuade  igno- 
rant people  that  the  dividends  could  not  fall  short  of  20 
per  cent,  and  to  part  with  £5,000  of  this  imaginary  wealth 
for  10,000  solid  guineas  than  to  load  a  ship  with  a  well- 
chosen  cargo  for  Virginia  or  the  Levant." 

Macaulay's  account  of  the  first  English  stock-market 
and  the  evils  to  which  it  gave  rise,  serves  as  a  description 
of  the  stock-market  of  to-day.  It  shows  at  once  the  legiti- 
mate reason  for  such  a  market  and  the  evils  to  which  it  is 
exposed.  We  hear  so  much  of  the  evils  that  we  are  apt  to 
overlook  the  fact  that  the  stock-market  represents  the  thrift 


40  THE  WORK  OF  WALL   STREET 

and  enterprise  of  the  people  even  more  than  it  does  their 
gambling  propensities. 

Wall  Street  is  commonly  pictured  in  the  newspapers  as 
an  American  Monte  Carlo.  But  it  has  been  well  said  that 
there  is  no  great  modern  nation  without  a  Stock  Exchange. 
The  first  Napoleon,  who  had  a  keen  appreciation  of  every- 
thing that  contributed  to  the  glory  of  France,  did  not  deem 
it  beneath  his  dignity  to  lay  the  corner-stone  of  the  Paris 
Bourse.  John  R.  Dos  Passes  has  said  that  "  it  is  absolutely 
certain  that  without  the  existence  of  great  public  marts, 
like  the  New  York  and  London  Stock  Exchanges,  the  mar- 
velous development  and  progress  of  this  country,  wrhich 
make  it  the  wonder  and  admiration  of  the  world,  would  not 
have  been  attained."  He  quotes  Judge  Bramwell,  in  a 
leading  English  case,  as  deciding  that  it  is  no  disadvantage 
that  there  should  be  a  market  where  speculation  may  go  on, 
for  it  is  owing  to  a  market  of  this  kind  that  there  are  so 
many  railroads  and  other  useful  undertakings. 

The  Stock  Exchange  provides  a  place  for  the  investment 
of  savings.  A  distinct  immorality  attaches  to  hoarding, 
but  investment  carries  a  double  blessing:  it  benefits  the 
investor  and  those  who  have  the  use  of  the  money.  There 
is  a  limit  to  real  estate  investments.  Not  everybody  can 
put  their  surplus  money  into  land.  There  must  be  other 
objects  of  investment.  So  capitalists,  large  and  small,  enter 
the  stock-market.  The  mechanic  who  puts  his  few  dollars 
into  the  savings-bank  enters  the  stock-market  by  proxy ;  the 
bank  invests  his  money  for  him,  some  of  it  in  real  estate, 
some  in  securities.  The  professional  man  who  buys  an  in- 
surance policy  enters  the  stock-market  by  proxy  ;  the  insur- 
ance company  invests  its  assets  very  largely  in  securities. 
When  it  is  said  that  there  are  in  the  United  States  0,373,000 
savings-bank  depositors  and  more  than  17,000,000  life-in- 
surance policies,  it  is  seen  how  large  a  proportion  of  the 
population  is  at  all  times  thus  indirectly  concerned  in  the 
stock-market.  Business  men  and  others  enter  Wall  Street 


THE  STOCK-MARKET  41 

directly,  for  the  purpose  of  investment  of  the  profits  of 
their  own  business.  The  stock-market,  therefore,  performs 
the  most  beneficent  function  of  providing  a  place  where 
investments  can  be  made  and  incomes  secured. 

As  practically  all  large  business  affairs  are  now  carried 
on  by  companies,  it  follows  that  stocks  and  bonds  constitute 
about  the  only  form  of  investment  outside  of  real  estate. 
And  they  are  the  best  form  of  investments ;  first,  because 
they  are  so  easily  converted  into  cash,  and.  secondly,  because 
they  are  so  easily  hypothecated  for  loans.  There  is  always 
a  market  for  securities  in  Wall  Street.  There  has  never 
been  a  time  in  recent  years  when  a  stock  or  bond  of  which 
Wall  Street  possessed  any  knowledge  could  not  be  sold 
there,  provided  the  price  was  satisfactory.  A  man  can  con- 
vert a  fortune  into  money  in  a  day,  or,  like  Andrew  Car- 
negie, capitalize  his  entire  business  in  a  single  operation. 
To  obtain  a  loan  on  real  estate  one  is  put  to  considerable 
expense  and  labor.  There  must  be  a  search  of  the  title, 
and  the  mortgage  to  secure  the  loan  must  be  duly  recorded. 
But  to  obtain  a  loan  on  marketable  securities,  all  one  has  to 
do  is  to  carry  them  in  an  envelope  to  a  lender  of  money, 
and  the  line  of  credit  may  be  obtained  in  a  few  minutes. 

Wall  Street  exists,  therefore,  because  the  business  of  the 
age  has  need  of  it,  because  it  is  essential  to  civilization. 
But,  like  everything  else  human,  this  useful  agency  of 
thrift  and  enterprise  is  liable  to  abuse.  Macaulay  has 
shown  how  more  than  two  centuries  ago  men  who  had 
saved  money  sought  to  invest  it,  an  act  of  the  highest  wis- 
dom, and  how  the  demand  for  investment  grew,  first  into  a 
craze  for  speculation,  and  finally  into  gambling  and  fraud. 

In  Wall  Street,  upon  the  substantial  foundation  of  in- 
vestment, has  been  built  a  vast  superstructure  of  specula- 
tion. Speculation  is  an  investment  of  money  in  which 
large  risk  is  taken  in  expectation  of  great  gain.  But  it  is 
not  easy  to  draw  the  line  where  investment  ends  and  specu- 
lation begins.  In  Wall  Street  such  a  line  is  drawn,  but  it  is 


42  THE  WORK  OF   WALL  STREET 

an  arbitrary  division.  "When  a  security  is  bought  and  paid 
for  in  full,  put  away  in  a  place  of  safe  keeping  and  held  for 
the  income  it  yields — that  is  called  an  investment.  The 
great  bulk  of  the  dealings  in  bonds  are  for  investment. 
When  a  security  is  bought  on  margin  and  held  for  sale  as 
soon  as  the  price  advances — that  is  speculation.  The  bulk 
of  the  dealings  in  stocks  are  speculative. 

But  speculation  may  be  as  truly  an  investment  as  invest- 
ment itself.  Most  investors  who  pay  outright  for  their 
securities  are  ready  to  sell  them  again  at  a  profit.  They 
buy  them  for  the  incomes,  but  if  the  advance  in  price  is 
large  enough,  the  profit  in  selling  may  be  more  attractive 
than  the  profit  in  keeping.  On  the  other  hand,  the  specu- 
lator buys  on  a  margin  to  sell  again  on  a  rising  price,  but 
he  buys  and  sells  on  an  income  basis  the  same  as  the  in- 
vestor. All  wholesale  business  in  modern  trade  is  done  on 
credit,  which  is  only  another  form  of  the  "Wall  Street  sys- 
tem of  margins.  The  merchant  who  restricts  his  purchases 
to  the  amount  his  cash  capital  can  pay  for  in  full,  must  do 
a  comparatively  small  business.  The  wholesaler's  capital, 
in  a  certain  sense,  corresponds  to  the  speculator's  margin. 
The  former  buys  on  time  and  borrows  of  the  bank  the 
money  to  pay  for  the  goods  as  the  time  for  payment  ap- 
proaches. "With  a  capital  of  $100,000  he  may  buy,  say, 
$500,000  worth  of  goods.  It  is  only  by  a  system  of  credits 
that  the  great  operations  of  modern  business  can  be  con- 
ducted. The  speculator  buys  stocks,  like  the  merchant,  on 
credit.  With  a  capital  of  $10,000  the  investor  can  buy  100 
shares  of  stock,  selling  at  par  value  of  $100  per  share,  and 
pay  for  them  in  full.  But  with  $10,000  deposited  as  a 
margin  the  speculator  can  buy  ten  times  as  much  stock, 
with  the  chance  of  realizing  ten  times  the  profit.  Of  course 
the  risk  is  much  greater.  If  the  price  declines  the  specu- 
lator may  lose  his  entire  margin  or  capital ;  but  the  mer- 
chant also  runs  a  risk  in  buying  goods  in  excess  of  the 
amount  of  his  capital.  Except  that  there  is  a  greater  mo- 


THE  STOCK-MAKKET  43 

bility  in  the  stock-market  than  in  other  markets,  so  that 
changes  in  prices  are  more  rapid  and  extreme,  the  risk  in 
both  cases  is  equal. 

The  operations  of  the  merchant  and  the  speculator  are 
therefore,  in  the  last  analysis,  essentially  the  same.  If  all 
business,  whether  in  stocks  or  in  trade,  were  conducted 
strictly  on  the  cash  or  investment  basis,  the  transactions 
would  be  very  limited.  Credit  means  expansion  and  activ- 
ity. In  times  of  panic,  when  credit  is  withdrawn,  specula- 
tion ceases,  and  all  business  becomes  of  the  investment 
order.  Then  stagnation  sets  in,  wages  fall,  and  wide-spread 
suffering  is  caused.  Some  one  has  said  that  speculation  is 
"  a  disease  of  the  mind  "  ;  but  Henry  Clews,  in  his  testi- 
mony before  the  Legislative  Committee  which  investigated 
corners  in  1881,  gave  a  far  better  definition.  He  said  that 
"speculation  is  a  method  for  adjusting  differences  of  opin- 
ion as  to  future  values,  whether  of  products  or  of  stocks. 
It  regulates  production  by  instantly  advancing  prices  when 
there  is  a  scarcity,  thereby  stimulating  production,  and  by 
depressing  prices  when  there  is  an  overproduction." 

There  is  a  point,  however,  where  speculation  becomes  a 
disease  of  the  mind :  it  is  the  point  where  it  changes  into 
mere  gambling.  If  it  is  difficult  to  draw  the  line  between 
investment  and  speculation,  it  is  still  more  difficult  to  draw 
that  between  speculation  and  gambling.  Yet  there  is  a 
difference  between  the  two,  although  many  critics  of  Wall 
Street  fail  to  see  it.  The  speculator  may  be  defined  as  a 
man  who,  making  a  study  of  business  conditions  and  of  the 
earning  power  of  the  companies  in  whose  stocks  he  pur- 
poses to  trade,  buys  because  he  believes  that  prices  ought  to 
advance,  or  sells  because  he  believes  they  will  fall ;  and 
does  so  on  a  margin  ample  to  protect  him  against  any  ordi- 
nary vicissitudes  of  the  market.  He  exercises  the  same 
foresight  and  conservatism  as  does  the  merchant  who 
places  a  large  order  for  goods.  The  gambler  in  stocks  is 
one  who  goes  it  "  blind,"  buys  and  sells  without  due  study 


4:4:  THE  WORK  OF  WALL  STREET 

of  conditions  or  of  the  property  in  which  he  invests,  but 
trusts  to  chance.  He  often  risks  more  than  he  can  afford 
to  lose,  perhaps  wasting  the  savings  of  many  months  in  one 
transaction.  He  might  as  well  risk  his  money  on  a  horse- 
race or  a  roulette  table.  "Wall  Street  is  full  of  gamblers  of 
this  kind.  "  People  will  deal  in  chance,"  said  Jay  Gould 
to  a  Senate  Committee.  "  Your  minister,  doctor,  and  bar- 
ber have  all  the  same  interest  in  speculation." 

Into  the  Street  crowd  hundreds  of  men  and  women, 
drawn  by  the  stories  told  of  the  enormous  fortunes  made 
there,  the  great  sums  cleared  in  one  deal,  the  big  profits  of 
a  single  transaction.  The  glamour  of  speculation  fasci- 
nates them.  In  the  year  1902  the  story  of  John  W.  Gates's 
sensational  deal  in  Louisville  and  Nashville  stock,  in  which 
he  bought  control  of  a  great  railroad  in  a  few  days,  served 
so  to  excite  the  gambling  propensities  of  the  country  that 
Wall  Street  was  soon  filled  with  a  crowd  of  outside  specu- 
lators. Without  training  or  study  or  intelligent  consider- 
ation, these  outsiders,  or  "  lambs,"  as  they  are  often  called, 
stake  their  money  on  the  mere  chance  of  the  rise  and  fall 
of  prices.  In  other  words,  they  bet  on  quotations.  No 
wonder  they  are  generally  well  sheared  in  the  Street. 
"  Gamesters  die  poor,"  says  Andrew  Carnegie  in  his  Em- 
pire of  Business,  "  and  there  is  certainly  not  an  instance  of 
a  speculator  who  has  lived  a  life  creditable  to  himself  or 
advantageous  to  the  community.  The  man  who  grasps  the 
morning  paper  to  see  first  how  his  speculative  ventures 
upon  the  exchanges  are  likely  to  result,  unfits  himself  for 
the  calm  consideration  and  proper  solution  of  business 
problems." 

The  gambling  in  stocks,  however,  is  not  limited  to  the 
class  of  outside  amateurs.  The  Street  has  its  professional 
gamblers  as  well — men  who  know  every  trick  of  the  des- 
perate business  in  which  they  are  engaged  ;  "  plungers  " 
who  take  enormous  risks  for  the  chance  of  enormous  gain. 
A  very  considerable  proportion  of  the  business  of  the 


THE  STOCK-MARKET 


Stock  Exchange,   and  practically  all  the  business  of  the 
bucket-shops,  is  pure  gambling. 

The  statistics  of  the  record-breaking  year  of  1901  may 
be  studied  to  advantage  by  those  who  desire  to  obtain  an 
idea  of  the  scope  of  speculation  and  of  some  of  the  laws 
which  govern  it.  In  that  year  the  total  sales  of  listed  and 
unlisted  stocks  traded  in  at  the  Stock  Exchange  represented 
a  par  value  of  $25,272,329,200,  which  was  three  times  the 
total  par  value  of  all  the  stocks  admitted  to  dealings  by 
the  Exchange — a  fact  revealing  the  speculative  character  of 
the  transactions.  In  a  single  year  the  entire  supply  of 
stocks  was  sold  three  times  over.  These  stocks  included 
many  that  are  rarely  traded  in  at  all.  In  the  active  stocks 
the  speculation  was  much  heavier,  and  there  were  some 
whose  entire  capital  changed  hands  ten  to  twenty  times 
over  in  the  course  of  a  year.  The  following  are  9  stocks 
the  total  number  of  whose  listed  shares  were,  in  1901,  sold 
nearly  fifteen  times  over : 


Total  sales  shares. 

Number  shares  listed. 

Times  sold. 

St.  Paul  

12  700  000 

558  218 

22f 

Union  Pacific     

22  246  000 

1  040  514 

2U 

American  Sn^ar  ... 

8  121  000 

450  000 

18 

Rock  Island    

8,195  000 

599619 

134 

Manhattan  
Wabash  (preferred)  
Atchison  

6.080,000 
3,009,000 
12.177.000 

480,000 
240,000 
1.020.000 

12| 
12i 

111 

Brooklyn  Rapid  Transit. 
Erie  

5,362.000 
11,185,000 

450,000 
1,123,470 

111 

11  8 

10 

89,081,000 

5,961,821 

14f 

This  means  not  only  speculation,  but  overspeculation. 
Such  a  market  could  hardly  be  termed  healthy,  and  it  is 
not  surprising  that  at  the  height  of  the  speculation  the 
severe  convulsion  of  May  9  occurred.  Xine  days  earlier, 
on  April  30,  the  total  sales  of  the  day  were '  3,270,884 
shares,  of  which  2,150,517  were  of  nine  stocks,  as  fol- 
lows : 


THE   WORK  OP  WALL  STREET 


Total  sales. 

Number  of 
shares  listed. 

United  States  Steel  

489,444 

5  084  780 

Erie  

309,800 

1  123  470 

Atchison  

247,450 

1  020  000 

United  States  Steel  (preferred)  

220,140 

5,102,773 

Union  Pacific  

206,353 

1  040  514 

Southern  Pacific  ... 

151,800 

1  978  321 

Atchison  (preferred)  

141,530 

1,141,995 

Northern  Pacific  

94,300 

1,550,000 

New  York  Central  

89,700 

1,150,000 

Thus,  in  one  day,  about  one-eighth  of  the  entire  capi- 
tal stock  of  9  great  companies  were  sold  in  the  Stock 
Exchange.  On  April  24,  1901,  662,000  shares  of  Union 
Pacific — two-thirds  of  its  entire  issue — were  sold.  On 
April  15,  1902,  877,000  of  the  total  1,200,000  shares  issued 
of  Southern  Railway  were  traded  in.  On  one  day  in 
February,  1893,  there  were  957,955  shares  ($50)  of  Ilead- 
ing  sold. 

It  is  only  within  a  recent  period  that  the  volume  of 
stock  transactions  has  been  studied  with  a  view  of  ascer- 
taining what,  if  anything,  they  reveal  of  the  real  condi- 
tions underlying  the  stock-market.  Most  people  imagine 
that  the  daily  total  of  sales  shows  only  the  degree  of  the 
market's  activity.  Sometimes  the  sales  do  not  even  do 
that,  for  it  not  infrequently  happens  that  professional  ma- 
nipulation swells  the  total  of  sales  when  the  market  actually 
is  dull.  A  few  months  ago  commission  houses  were  com- 
plaining of  a  lack  of  business  when  the  daily  sales  aver- 
aged 600,000  shares.  As  a  matter  of  fact,  however,  the 
record  of  sales  intelligently  studied  proves  one  of  the 
most  important  indices  to  the  actual  conditions  of  the 
market.  One  of  the  oldest  and  largest  banking-houses  in 
Wall  Street  keeps  a  careful  record  of  total  sales  as  one  of 
its  guides  to  its  judgment  of  the  course  of  the  market. 
Taking  the  sales  of  20  active  railroad  stocks  as  the  basis 
of  its  calculations,  it  has  for  twelve  years  divided  the 


THE  STOCK-MARKET  47 

record  of  these  sales  into  two  columns,  one  giving  the 
total  transactions  when  prices  were  advancing,  and  the 
other  the  sales  when  prices  were  declining.  The  fol- 
lowing table,  prepared  by  this  house,  shows  the  millions 
of  shares  of  20  active  railroad  stocks  dealt  in  in  the  bull 
and  bear  periods  of  each  year : 

Sales 


MILLIONS  OF  SHARES. 

EXCESS. 

Bull  periods.  Bearperiods. 

1 

Bull. 

Bear. 

1890      

24 

26 
38 
17 
16 
32 
21 
47 
49 
116 
114 
170 

15 
24 
48 
51 
23 
30 
30 
22 
47 
88 
43 
72 

9 
2 

'2 

25 
2 

28 
71 
98 

io 

34 

7 

*9 

1891  

1892  

1893  

1894.     ...           

1895  

1896  

1897  

1  898  

1899  

1900.                

1901  

An  examination  of  this  table  shows  that  in  the  ten 
years  from  1890  to  1899,  inclusive,  the  number  of  shares 
dealt  in  in  the  bull  periods  was  only  8,000,000  more  than 
the  number  sold  in  the  bear  periods.  In  other  words,  every 
share  bought  in  those  ten  years  was  sold  again,  excepting 
8,000,000,  the  total  transactions  of  the  20  stocks  having 
been  7<34,0  30,000  shares.  It  is  a  fair  inference  that  the 
8,000,000  went  into  the  hands  of  permanent  investors. 
The  remaining  756,000,000  shares  represented  the  specula- 
tive business.  In  the  panic  year  of  1893  the  sales  in  the 
declining  market  were  3i,00o,000  shares  in  excess  of  the 
sales  in  the  bull  periods.  In  the  boom  years  of  1900  and 
1901  the  excess  of  shares  traded  in  in  the  bull  periods  over 
those  sold  in  the  bear  periods  was  ir>9,000,000.  In  the 
preceding  ten  years,  as  has  been  seen,  the  bull  and  bear 


48  THE  WORK  OP  WALL  STREET 

periods  nearly  balanced  each  other,  but  here,  in  two  years, 
a  tremendous  excess  appears  on  the  bull  side.  The  in- 
ference drawn  from  this  was,  that  an  immense  number  of 
shares  had  been  bought  for  sale,  but  were  still  held  await- 
ing a  favorable  opportunity  for  realization  of  profits  or 
possibly  a  time  of  forced  liquidation. 

During  the  year  1901  the  sales  of  stock  averaged  up- 
ward of  900,000  shares  a  day  except  on  Saturdays,  when 
the  Exchange  is  open  only  for  two  hours.  There  were 
several  Saturdays,  however,  in  which  the  two  hours'  busi- 
ness aggregated  more  than  1,000,000  shares. 

Taking  900,000  shares  a  day  as  a  basis  of  calculation,  it 
is  roughly  estimated  that  300,000  shares  represent  manipu- 
lation, 300,000  the  transactions  of  the  room  traders,  and 
300,000  the  actual  buying  and  selling  by  pools  and  public. 
Therefore,  on  an  average  day,  only  one-third  of  the  total 
transactions  represents  real  business  outside  of  manipula- 
tion and  room  trading.  This  estimate,  of  course,  is  merely 
an  estimate  of  average  conditions.  There  are  days  when 
manipulation  represents  nearly  all  of  the  dealings.  There 
are  other  days  when  the  room  traders  constitute  nearly 
the  entire  market.  There  are  days  in  which  the  public  is 
predominant. 

Taking  one  month  with  another,  there  is  probably  an 
average  of  60,000  persons  in  the  stock-market  all  the  time. 
In  periods  of  activity  there  are  doubtless  many  more,  in 
periods  of  dulness  and  uncertainty  many  less,  but  the  market 
can,  as  a  rule,  depend  upon  this  support  for  its  speculative 
business.  It  does  not  follow  that  the  same  00,000  persons 
are  in  the  market  all  the  time.  "Wall  Street  is  like  a  hotel. 
Xew  guests  are  constantly  arriving  and  others  leaving. 
Sometimes  every  room  is  occupied  and  cots  have  to  be 
placed  in  the  halls,  so  great  is  the  crush.  At  other  times 
half  the  house  is  empty.  This  estimate  applies  only  to  the 
Xew  York  Stock  Exchange  and  its  customers.  To  the 
60,000  individuals  who  constitute  its  market,  must  be  added 


THE  STOCK-MARKET  49 

the  many  patrons  of  the  Consolidated  Stock  &  Petroleum 
Exchange,  and  the  crowd  of  small  speculators  who  fre- 
quent the  bucket-shops,  and  who  may  be  likened  to  the 
camp-followers  of  a  great  army.  The  New  York  Stock 
Exchange,  however,  makes  the  market  for  stocks.  Its 
prices  govern  the  outside  speculation  as  absolutely  as  they 
do  that  within  its  own  walls ;  and  while  the  outside  specu- 
lation is  of  a  very  considerable,  though  unknown,  volume, 
in  speaking  of  the  "  stock-market "  the  reference  is  always 
to  the  business  of  the  Stock  Exchange. 

The  market  is  divided  into  two  main  divisions :  one, 
the  bulls,  representing  those  who  buy  stocks  in  the  expec- 
tation that  they  can  sell  at  higher  prices;  and  the  other, 
bears,  or  those  who  sell  stocks  in  the  expectation  that  they 
can  buy  them  later  at  lower  prices.  A  bull  who  has 
bought  is  "  long "  of  the  market ;  a  bear  who  has  sold  is 
"  short "  of  the  market.  A  "  long  "  who  sells  at  higher  prices 
is  said  to  have  realized  his  profits,  or  if  he  sells  at  a  loss  is 
said  to  have  liquidated.  In  case  the  sale  is  the  result  of 
an  exhausted  margin  or  the  calling  of  loans,  it  is  forced 
liquidation.  A  "  short "  who  buys  stocks  is  said  to  have 
"  covered,"  and  this  term  applies  whether  he  has  bought  at 
a  profit  or  a  loss.  When  too  many  persons  have  bought 
stocks  the  "  long  "  interest  becomes  too  heavy  for  the  mar- 
ket to  carry,  and  it  is  generally  comparatively  easy  for  the 
bears,  by  selling  short,  to  depress  prices  and  force  the 
"  longs  "  to  sell,  when  the  "  shorts  "  can  cover  at  a  profit. 
This  operation  is  generally  called  "  a  bear  raid.''  On  the 
other  hand,  when  the  "short"  interest  becomes  too  large  it 
is  generally  easy  for  the  bulls  to  advance  prices,  thus  for- 
cing the  "  shorts  "  to  cover.  A  "  short  "  interest  is  often  an 
element  of  strength  to  the  market  because  it  creates  a  de- 
mand for  stocks  to  cover. 

There  are  t\vo  other  divisions  in  the  market,  the  profes- 
sionals and  the  public.  The  professionals  are  those  who 
make  a  business  of  speculation.  The  public  is  a  class  of  in- 


50          THE  WORK  OF  WALL  STREET 

dividuals  who,  engaged  in  trade  or  commerce,  appear  in  the 
Street  as  occasional  speculators. 

In  a  newspaper  of  August  3,  1835,  appeared  this  inter- 
esting item :  "  New  Orleans,  Kentucky,  Tennessee,  and 
Ohio  stocks  sell  at  high  prices.  Merchants  bring  parcels 
of  these  stocks  across  the  mountains.  They  are  better  than 
bills  of  exchange.  A  great  many  merchants  in  the  streets 
around  Wall  Street  now  dip  privately  in  stock  speculation. 
Many  of  the  officers  of  the  banks  and  insurance  companies 
do  the  same  thing.  This  is  the  cause  of  the  great  increase 
of  stock  speculation.  Pearl  Street  is  nearly  impassable  by 
reason  of  the  quantity  of  boxes  on  the  sidewalks.  So  in 
Wall  Street  by  the  groups  of  brokers." 

This  is  an  early  picture  of  the  public  in  the  stock-mar- 
ket. To-day,  as  nearly  seventy  years  ago,  merchants  dip 
not  only  privately,  but  openly  in  speculation  ;  while  not 
only  New  Orleans,  Ohio,  and  Tennessee  are  represented  in 
the  market,  but  Chicago — a  city  then  unknown — and  the 
great  far  West,  reaching  even  to  the  Pacific.  For  the  stock- 
market  is  thoroughly  national  in  its  scope. 

A  market  that  has  no  "public"  is  in  a  most  unsatis- 
factory condition.  Professionals  can  and  do  buy  and  sell 
among  themselves,  but  this  is  a  process  not  unlike  the 
"  swapping"  of  horses  between  regular  horse  traders.  The 
public  supplies  the  new  interest  in  the  Street,  the  fresh  de- 
mand, the  increased  capital.  We  have  already  seen  that 
only  about  one-third  of  all  the  transactions  represents  real 
buying  or  selling  outside  of  manipulation  and  room  trad- 
ing. Of  this  one-third,  the  public  interest  is  decidedly  the 
most  important. 

The  professional  is  a  class  that  includes  many  different 
kinds  and  degrees  of  operators.  The  banking-house  carrv- 
ing  150,000  and  more  shares  and  the  curbstone  specu- 
lator who  buys  10  and  20  shares  may  both  be,  in  the 
true  sense,  professionals.  They  are  both,  one  in  a  whole- 
sale and  the  other  in  a  retail  way,  engaged  in  the  busi- 


THE  STOCK-MARKET  51 

ness  of  discounting  the  future.  Both  make  a  study  of 
values  and  make  a  profit,  large  or  small,  by  their  in- 
telligence in  correctly  reading  the  signs  of  the  times. 
They  are  the  skilled  workmen  of  the  Street,  and  they  con- 
stitute a  highly  trained  body  of  experts  in  stock  values  and 
market  prices.  In  their  way  they  display  as  much  ability 
as  the  scientist,  the  artist,  and  the  artisan.  In  this  class  of 
professionals  are  many  skilled  in  manipulation.  In  this 
class  also  must  be  placed  the  room  traders,  or  those  mem- 
bers of  the  Exchange  who  do  business  only  for  their  own 
account  and  who  become  skilled  in  knowing  how  to  take 
quick  advantage  of  the  ever-moving  prices  in  the  board 
room.  To  the  professional,  speculation  is  like  a  game  of 
chess ;  and  a  man  like  James  R.  Keene  plays  it  with  the 
skill  of  a  Lasker,  and  will  often  call  "  mate  in  twelve 
moves"  before  his  opponent  even  realizes  that  he  is  in 
difficulty. 

There  is  still  another  class  of  speculators  who  are  called 
"  insiders."  They  are  directors  or  officials  of  corporations 
or  in  other  positions  where  it  is  possible  to  obtain  inside 
information  as  to  the  business  of  the  companies  whose 
stocks  are  traded  in  in  AVall  Street.  They  know  things 
in  advance  of  the  public  or  even  the  professionals.  They 
are  able  to  speculate  on  the  vantage-ground  of  certain 
knowledge,  but  even  insiders  sometimes  slip  in  their  op- 
erations. There  have  been  speculative  directors  who, 
selling  the  stock  of  their  own  company  short,  have  found 
themselves  cornered.  It  is  an  adage  in  the  Street,  that 
there  is  no  easier  way  to  lose  money  than  to  bet  on  a  "  sure 
thing." 

There  are  4^0  different  stocks  admitted  to  dealings  in 
the  Stock  Exchange,  but  there  has  never  been  a  day  in 
which  as  many  as  W2oo  of  these  have  been  actually  traded 
in.  About  150  stocks  constitute  an  average  day's  market. 
Stocks  actually  traded  in  are  called  active  ;  those  not  traded 
in  are  inactive.  A  stock  mav  be  active  to-day  and  inactive 


52  THE  WORK  OF   WALL  STREET 

to-inorrow,  and  the  reverse.  There  are  two  main  divisions 
in  the  stock-list,  namely,  railroad  stocks  and  industrials. 
There  are  several  subdivisions  in  each  of  these  two  classes. 
The  railroad  stocks  are  divided  into  groups  representing 
systems.  For  instance,  there  are  the  trunk-line  group, 
representing  the  Pennsylvania,  the  New  York  Central,  the 
Erie,  the  Lackawanna,  and  the  Baltimore  &  Ohio;  the 
coalers,  including  the  Reading,  the  Jersey  Central,  the 
Lehigh  Yalley,  the  Delaware  &  Hudson,  and  the  Lacka- 
wanna, which  are  carriers  and  miners  of  anthracite  coal ; 
the  Grangers,  which  include  the  St.  Paul,  the  Northwestern, 
the  Burlington,  the  Rock  Island,  and  other  lines  in  the 
grain -producing  section  of  the  country ;  and  the  transconti- 
nental stocks,  comprising  the  Union  Pacific,  the  Southern 
Pacific,  the  Atchison,  the  Northern  Pacific,  and  the  Great 
Northern,  which  are  lines  stretching  from  the  Middle  West 
to  the  Pacific.  The  traction  stocks  are  those  of  the  lead- 
ing street  -  railway  systems.  The  industrials  are  divided 
into  groups  representing  manufacturing,  mercantile,  oil, 
gas,  electric,  and  other  companies.  Both  classes  of  stocks 
are  further  subdivided  into  groups  representing  owner- 
ship. For  instance,  the  Standard  Oil  group  includes  Stand- 
ard Oil,  Amalgamated  Copper,  and  the  Missouri,  Kansas 
&  Texas,  in  which  the  Rockefellers  and  other  Standard 
Oil  capitalists  are  interested. 

Restricting  ourselves  to  the  railroad  list  only,  the  Yan- 
derbilt  group  consists  of  the  New  York  Central,  the  Bos- 
ton &  Albany,  the  West  Shore,  the  Harlem,  the  Rome, 
Watertown  &  Osrdensbnrg,  the  Lake  Shore,  the  Michi- 

O  o  t 

gan  Central  &  Canada  Southern,  the  Cleveland,  Cincin- 
nati, Chicago  &  St.  Louis,  the  New  York,  Chicago  &  St. 
Louis,  the  Lake  Erie  &  Western,  the  Northern  Ohio,  the 
Pittsburg  &  Lake  Erie,  and  the  Chicago  &  Northwestern, 
the  whole  making  a  system  represented  by  81,157,000,000 
of  stocks  and  bonds.  The  Yanderbilts  also  own  one-half 
of  the  Chesapeake  &  Ohio,  and  are  interested  in  the 


THE  STOCK-MARKET  53 

Lackawanna,  the  Delaware  &  Hudson,  and  the  Lehigh 
Valley. 

The  Pennsylvania  group  consists  of  the  Pennsylvania 
Railroad,  the  Pennsylvania  Company,  the  Pittsburg,  Cin- 
cinnati, Chicago  &  St.  Louis,  the  Pittsburg,  Fort  "Wayne  & 
Chicago,  the  Cleveland  &  Pittsburg,  the  Western  New 
York  &  Pennsylvania,  the  Long  Island,  the  Norfolk  & 
Western,  the  Baltimore  &  Ohio,  and  the  Chesapeake  & 
Ohio,  constituting  a  system  represented  by  $1,341,000,000 
of  securities. 

The  Gould  group  consists  of  the  Missouri  Pacific,  the 
St.  Louis  &  Southwestern,  the  Texas  &  Pacific,  the  Inter- 
national &  Great  Northern,  the  Denver  &  Rio  Grande, 
the  Rio  Grande  Western,  the  Wabash,  and  the  Wheeling  & 
Lake  Erie,  whose  stocks  and  bonds  aggregate  $810,000,000. 
To  this  group  have  recently  been  added  the  Ann  Arbor, 
the  Western  Maryland,  and  the  West  Virginia  Central. 

The  Morgan-Hill  group  consists  of  the  Northern  Pa- 
cific, the  Great  Northern,  the  Chicago,  Burlington  & 
Quincy,  the  Erie,  and  the  Chicago,  Indiana  &  Louisville, 
the  first  three  being  included  in  the  much-discussed  North- 
ern Securities  Company.  This  group  is  represented  by 
$1,398,000,000  of  securities. 

The  Morgan  group  consists  of  the  Reading,  the  Jersey 
Central,  the  Lehigh  Aralley,  and  the  Southern  Railway,  to 
which  has  been  recently  added  the  Louisville  &  Nashville, 
their  total  securities  being  $1,014,000,000. 

The  Harriman  group  consists  of  the  Union  Pacific,  the 
Southern  Pacific,  the  Illinois  Central,  and  the  Chicago  & 
Alton,  whose  securities  aggregate  $1,046,000,000. 

Thus  W.  K.  Vanderbilt,  A.  J.  Cassatt,  George  J.  Gould, 
J.  Pierpont  Morgan,  James  J.  Hill,  and  E.  II.  Harriman, 
and  the  capitalists  associated  with  them,  represent  $6,756,- 
000,000  of  railroad  stocks  and  bonds,  or  considerably  more 
than  one-third  of  all  the  securities  traded  in  at  the  Ex- 
change. They  are  also  interested  in  many  industrials  and 


54  THE   WORK  OF   WALL  STREET 

traction  companies,  Mr.  Morgan  being  the  dominating  force 
in  the  United  States  Steel  Corporation,  and  Mr.  Gould 
controlling  the  Western  Union  Telegraph  and  the  Man- 
hattan Elevated  Railroad. 

There  is  still  another  line  of  separation  in  the  market — 
that  dividing  securities  into  listed  and  unlisted  stocks  and 
bonds.  Both  are  dealt  in  on  the  Exchange,  and  the  differ- 
ence between  them  will  be  explained  in  another  chapter. 

It  is  important  to  keep  these  different  classes  and 
groups  in  mind  in  order  to  understand  Wall  Street,  for 
the  stock-market  is  a  collection  of  many  small  markets, 
each  distinct  from  the  other  and  subject  to  special  influ- 
ences, and  yet  bound  to  the  others  by  certain  great  forces. 
There  are  days  when  the  entire  list  rises  or  falls,  swayed  by 
some  irresistible  influence  which  controls  the  movements 
of  prices  without  distinction  of  classes  or  groups  or  names. 
On  other  days,  however,  the  different  groups  move  inde- 
pendently of  each  other.  For  instance,  if  the  banks  are 
discriminating  in  loans  against  unlisted  stocks,  these  may  be 
very  weak  while  the  rest  of  the  stocks  may  be  strong. 
At  other  times  the  industrials  advance,  while  the  railroad 
stocks,  perhaps  because  of  a  war  of  rates  or  some  adverse 
legislation,  may  decline.  Bad  crop  news,  which  would  de- 
press the  Grangers,  might  not  have  any  effect  on  the  trans- 
continental stocks.  A  strike  of  miners  would  hurt  the  coal- 
ers, but  might  not  affect  the  Grangers.  Mr.  Gould  might 
be  engaged  in  certain  operations  that  would  influence  the 
prices  of  his  stocks,  while  those  of  the  Vanderbilts  might 
not  change  in  the  least.  There  is,  however,  a  strange  thing 
in  the  market  which  is  called  "sympathy,''  and  it  sometimes 
happens  that  one  stock  or  group  of  stocks  will  have  a  sym- 
pathetic effect  upon  another,  although  there  is  no  close  con- 
nection between  them. 


CHAPTER  IV 


VALUES    AND   PRICES 

EVERY  reader  of  the  financial  page  of  a  daily  newspa- 
per— and  there  is  no  other  page  more  frequently  consulted 
—is  familiar  with  the  table  of  figures,  a  column  long,  headed 
"  Sales  at  the  New  York  Stock  Exchange  "  or  "  Quotations 
for  Stocks."  This  table  is  generally  presented  as  follows : 


Sales. 

STOCKS. 

Open- 
ing. 

High. 

Low. 

Close. 

Net 
changes. 

80,650 
50.900 

Amalgamated  Copper..  .  . 
American  Sugar  

o:U 
12Gi 

65| 
12Gf 

63| 

123| 

65£ 

1254- 

+  1 
—   f 

37.905 
13.120 
25.000 

Manhattan  Elevated  .... 
Pennsylvania  Railroad  .  . 
Heading  

129| 
150| 
541 

132f 
1501 

55* 

1291 
150* 

54i 

132 
150f 
54l 

+  2| 
+   * 

22,735 

U.  S.  Steel  (preferred).  .  .  . 

94 

94  1 

931 

94f 

+   1 

This  is  an  abbreviation  of  one  day's  quotation  list. 
The  first  column  gives  the  number  of  shares  sold  ;  the  sec- 
ond the  name  of  the  stock ;  and  then  follow  the  opening, 
highest,  lowest,  and  closing  prices  of  the  day.  The  last 
column  shows  the  net  change  for  the  day,  namely,  the  dif- 
ference between  the  closing  prices  of  to-day  and  yester- 
day. The  phis  sign  signifies  an  advance ;  the  minus  sign,  a 
decline  ;  no  sign,  that  the  price  remains  the  same.  For  in- 
stance, on  this  day  80,650  shares  of  Amalgamated  Copper 
were  sold.  Its  opening  price  was  s<;3.50  a  share  ;  its  high- 
est price  was  $65.37-| ;  its  lowest,  8(>3.37ir;  its  closing, 
§65.12^-.  This  closing  price  was  one  dollar  a  share  higher 
than  the  closing  price  of  the  day  preceding.  Xow,  it  does 


56 


THE  WORK  OF   WALL  STREET 


not  follow  that  because  only  four  prices  are  quoted  in  this 
list  that  there  were  only  four  prices  during  the  day.  On 
the  contrary,  there  were  probably  a  hundred  different  trans- 
actions in  this  stock,  and  thus  a  hundred  prices.  Every 
sale  made  during  the  day  is  recorded  by  the  stock  indica- 
tor, or  ticker,  but  most  papers  give  only  a  summary  show- 
ing the  opening,  highest,  lowest,  and  closing  prices. 

To  an  outsider  the  phenomena  of  sudden  changes  in 
prices,  even  in  one  day,  seem  an  insoluble  mystery  ;  and 
even  the  Wall  Street  expert  is  often  puzzled  to  account  for 
the  frequent  and  wide  divergence  of  prices  and  values. 
Why,  it  may  be  asked,  should  such  a  stock  as  Manhattan 
sell  as  high  as  132f  and  as  low  as  129|  in  one  day  ? 
Surely  the  difference  of  2|-  in  price  could  scarcely  repre- 
sent any  corresponding  change  in  the  earning  power  of  the 
road.  Frequently  prices  fluctuate  far  more  widely  than 
that.  A  difference  of  $10  and  even  $25  a  share  may  occur 
in  the  price  of  a  stock  in  two  or  three  hours.  In  the 
spring  of  1902  American  Power  broke  from  198  to  120 
in  one  day,  and  in  the  Northern  Pacific  corner  the  com- 
mon stock  of  that  railroad  advanced  several  hundred  points 
to  1,000.  How  wide  the  fluctuations  may  be  in  the  course 
of  a  year  is  indicated  in  the  following  selection  from  the 
quotation  list  of  1901,  giving  the  price  changes  of  three 
industrials  and  three  railroad  stocks : 


High. 

Low. 

Close. 

Amalgamated  Copper  

130 

G(H 

69| 

American  Su<;ar  

152i 

103i 

1  1  (5| 

A  rncrican  Tobacco  

144 

99 

138 

Atchison  

!)1 

42i 

80i 

St.  Paul  

188 

134 

10o| 

Union  Pacific  

1&3 

76 

10o| 

Even  a  superficial  observer  realizes  the  absolute  incon- 
sistency that  often  exists  between  values  and  prices. 
Logically,  the  price  of  a  stock  ought  to  be  identical  with 


VALUES  AND   PRICES  57 

its  true  value.  In  fact,  the  two  are  often  widely  separated. 
A  dividend -pay  ing  standard  stock  of  international  reputa- 
tion like  St.  Paul  sells  at  one  hundred  different  prices  in 
the  course  of  a  day  or  week,  and  in  the  course  of  a  year, 
as  has  been  seen,  the  difference  between  the  highest  and 
lowest  prices  is  $50  a  share.  Is  there  an  adequate  expla- 
nation of  this  mystery  ?  AVe  are  now  face  to  face  with 
one  of  the  fundamental  problems  of  the  stock-market. 

This  difference  between  intrinsic  values  and  market 
prices  is,  however,  by  no  means  confined  to  Wall  Street, 
although  it  is  more  strikingly  exhibited  there.  A  man 
owns  a  house  from  which  he  derives  a  net  income  of 
$1,000.  The  house  is  worth,  say,  $20,000,  and  the  income 
of  $1,000  is  5  per  cent  on  the  investment.  But  if  he  had  to 
sell  the  house  quickly  he  might  not  find  a  ready  purchaser, 
and  would  have  to  sacrifice  the  property,  say,  for  $10,000. 
There  has  been  no  change  in  the  actual  worth  of  the  house. 
It  is  in  as  good  a  condition  as  before,  and  the  income  con- 
tinues, but  the  price  is  50  per  cent  of  the  true  value.  Or 
the  owner  of  the  property  may  find  that  a  corporation 
wants  it  for  some  important  purpose,  and  is  willing  to  pay 
a  big  price  for  immediate  possession.  In  this  case  an 
urgent  demand  has  advanced  the  price,  although  there  has 
been  no  change  in  income.  Let  us  carry  the  illustration 
further.  Suppose  the  corporation  wants  the  property,  but 
wants  it  cheap,  and  is  willing  to  wait  a  while  for  it.  There- 
upon it  begins  to  manipulate  the  market  for  real  estate  in 
that  vicinity,  and  by  various  expedients  impresses  the 
owner  with  the  belief  that  the  prices  of  property  on  the 
street  are  likely  to  decline,  and  that  he  had  better  sell  for 
what  he  can  get  now  than  wait  and  perhaps  do  worse. 
There  has  been  no  change  in  value  as  measured  by  income, 
but  manipulation  has  changed  the  price.  Apply  all  this  to 
stocks,  and  an  idea  is  formed  of  the  conditions  that  pro- 
duce the  often  startling  differences  between  values  and 
prices. 


58 


THE  WORK  OF  WALL  STREET 


If  prices  always  represented  value  it  would  seem  as  if 
stocks  paying  4-per-cent  dividends  would  sell  practically  at 
the  same  prices ;  those  paying  5  per  cent  at  higher  prices, 
and  so  on.  That  this  is  not  always  the  rule  is  shown  by  the 
following  table,  giving  the  yearly  dividends  in  1901  and  the 
last  prices  of  that  year  of  a  number  of  well-known  stocks : 


Dividends. 


Last  prices.  1901. 


Manhattan 4 

Michigan  Central 4 

Baltimore  &  Ohio 4 

Western  Union 5 

Louisville  &  Nashville 5 

New  York  Central 5 

Canadian  Pacific 5 

Rock  Island 5 

Omaha 5 

Jersey  Central 5 

St.  Paul 6 

Nort  h  west 6 

Illinois  Central 6 

Pennsylvania G 

American  Tobacco 6 

Sugar 7 

Metropolitan 7 

Lackawanna 7 

Lake  Shore 7 

Consolidated  Gas 8 

Pullman  Palace  Car  . .  8 


137i 
156 


92$ 

106| 


140 
195 

165J 

206 

139 

150J 

138 

1161 

161 

2571 

350 

219J 

218 


It  is  not  easy  to  reconcile  the  apparent  inconsistency  of 
a  G-per-cent  stock  selling  for  less  than  a  4-per-cent,  and  an 
8-per-cent  stock  selling  for  less  than  a  T-per-cent.  It  seems 
evident,  however,  that  prices,  while  controlled  by  intrinsic 
value  up  to  a  certain  point,  are  subject  also  to  certain  laws 
that  do  not  affect  values  in  the  least. 

What  constitutes  value  ?  In  the  case  of  a  bond  its 
value  is  measured  : 

1.  By  its  rate  of  interest. 

2.  By  the  date  of  its  maturity. 

3.  By  the  nature  of  the  security  pledged  for  the  pay- 
ment of  the  principal. 


VALUES  AND  PRICES  59 

4.  By  the  supply  of  money  seeking  investment. 
In  the  case  of  a  common  stock  value  is  measured  : 

1.  By  the  dividend  it  pays. 

2.  By  the  net  income  of  the  company  after  payment  of 
fixed  charges  and  operating  expenses,  all  such  net  income 
belonging  to  the  stock. 

3.  By  the  character  of  the  management,  on  which  in 
large  measure  depends  the  continuance  of  dividend  pay- 
ments. 

What  makes  the  price  ?  By  price,  of  course,  is  meant 
the  sum  of  money  for  which  a  stock  or  bond  is  sold  in  the 
market.  Price,  strictly  speaking,  should  be  value  expressed 
in  dollars,  and  quotations  are  prices  as  recorded  on  the  tape 
or  in  the  market  report.  The  chief  influences  that  make 
prices  are  : 

1.  Intrinsic  value. 

2.  Current  news,  which  may  not  affect  real  values  in 
the  least,  but  which  Wall  Street  thinks  may  enhance  or  in- 
jure values. 

3.  The  condition  of  the  market  machinery  for  specula- 
tion.    For  instance,  stringency  in  the  money-market  may 
not  affect  the  earning  power  of  a  company  in  the  least,  but 
may  temporarily  affect  the  market  price  of  its  stock. 

4.  Manipulation,  or  the  fine  art  of  making  prices  what 
the  manipulators  want  them  to  be,  independent  of  what 
they  ought  to  be. 

5.  The  market  supply  of  the  stock  for  speculative  pur- 
poses. 

AVall  Street  is  always  striving  to  discount  the  future, 
and  much  of  the  mystery  that  surrounds  this  question  of 
price  is  cleared  up  by  keeping  in  mind  the  fact  that  the 
price  represents  what  the  Street  thinks  to-day  will  be  the 
values  of  to-morrow  or  next  month  or  next  quarter.  Often 
prices,  while  at  variance  with  present  values,  accurately 
represent  future  values.  Quite  as  often  they  do  not. 

In  the   case  of  a  railroad  stock,  its   dividend  -  paying 


60  THE  WORK  OP  WALL  STREET 

power  depends  upon  the  state  of  trade,  the  size  of  the 
crops,  the  character  of  the  country  through  which  the  road 
runs,  and  also  in  no  small  degree  upon  the  skill  and  hon- 
esty of  its  management.  The  rate  of  dividend  may  there- 
fore change  greatly  from  year  to  year.  Take  the  case  of 
even  such  a  standard  stock  as  that  of  the  New  York  Cen- 
tral. From  1869  to  1884  it  paid  8  per  cent,  but  in  1885  it 
dropped  to  3^  per  cent ;  from  1886  to  1889  it  paid  4  per 
cent ;  the  next  two  years,  4^  per  cent ;  in  1892,  5^  per  cent ; 
the  next  two  years,  5  per  cent ;  in  1895,  4^  per  cent ;  the 
next  three  years,  4  per  cent ;  in  1899,  4J  per  cent ;  and  in 
1900  and  1901,  5  per  cent. 

It  is  the  uncertainty  which  attends  the  business  of  the 
great  corporations  that  makes  their  stocks  so  attractive  for 
speculative  purposes  and  their  prices  fluctuate  so  widely. 
It  follows  that  if  two  4-per-cent  stocks  sell  at  different 
prices,  it  may  be  because,  first,  there  is  a  real  difference  in 
their  prospects  of  future  income,  the  earnings  of  one  for- 
ging ahead  while  those  of  the  other  are  decreasing;  or,  sec- 
ond, they  are  subject  to  differing  influences  that  affect 
prices  and  not  true  values,  for  it  may  happen  that  two 
stocks  of  actual  equal  value  may  sell  at  different  prices  at 
the  same  time. 

The  average  prices  of  the  entire  list  may,  for  a  consid- 
erable period,  vary  greatly  from  the  true  measures  of  value. 
Inasmuch  as  values  depend  on  the  prosperity  or  the  reverse 
of  the  country,  it  ought  to  follow  that  Wall  Street  prices 
should  correspond  to  the  actual  conditions  of  trade.  This 
is  always  true  if  the  period  of  comparison  be  made  long 
enough,  but  it  is  not  always  the  case  for  short  periods,  and 
sometimes  not  for  a  year  at  a  time.  For  one  thing,  the 
stock-market  is  often  ahead  of  the  rest  of  the  country,  in- 
asmuch as  it  strives  to  discount  future  conditions,  so  that 
an  advance  in  stock  values  may  precede  a  boom  in  business, 
and  prices  actually  waver  and  decline  by  the  time  the  ac- 
tivity in  trade  has  reached  its  height. 


VALUES  AND  PRICES  61 

But  another  cause  may  make  one  stock  or  group  of 
stocks,  or  indeed  the  entire  market,  to  swerve  from  the 
line  of  value.  That  cause  is  manipulation.  There  exists 
in  Wall  Street,  as  has  been  seen,  a  class  of  professional 
speculators  who  make  the  stock-market  their  life  study  and 
business.  These  men  base  their  operations,  or  try  to,  on 
values  as  measured  by  income,  but  they  study  value  so  as 
to  be  able  to  buy  at  less  than  value,  and  then  they  work  to 
sell  at  as  much  more  than  value  as  they  can  get.  They 
employ  every  means  in  their  power  to  make  stocks  attract- 
ive to  investors  and  other  possible  buyers  when  they  are 
long  and  want  to  sell ;  or  to  make  the  market  appear  doubt- 
ful or  dangerous  when  they  are  short  and  want  to  buy.  It 
has  already  been  shown  how  large  a  part  in  the  market 
manipulation  plays ;  and  for  days,  weeks,  and  sometimes 
for  months,  prices  may  represent  manipulation  more  than 
they  do  intrinsic  value. 

Various  attempts  have  been  made  to  construct  a  sci- 
entific theory  covering  this  whole  subject  of  values  and 
prices.  The  most  satisfactory  of  these  is  that  evolved  by 
Charles  AV.  Dow.  His  theory  is  based  on  the  unmistaka- 
bly sound  principle  that,  in  the  long  run,  prices  are  con- 
trolled by  values.  lie  discovers  three  distinct  movements 
of  prices  in  progress  so  far  as  common  stocks  are  concerned, 
namely  : 

Primary. — This  is  governed  by  intrinsic  values,  and  is 
the  most  powerful  of  the  three. 

Secondary,  or,  as  Mr.  Dow  calls  it,  the  "  swing." — This 
is  governed  by  manipulation  and  by  current  events  tempo- 
rarily affecting  actual  values  and  the  market  machinery. 

Tertiary. — The  daily  fluctuations. 

Trifling  causes,  a  mere  rumor,  the  operations  of  room 
traders,  may  and  often  do  control  the  price  fluctuations  of 
a  day.  The  concerted  operations  of  great  operators  may, 
and  often  do,  control  the  price  movement  of  weeks  and 
months.  But  the  primary  movement,  that  based  on  value, 


62  THE  WORK  OP  WALL  STREET 

lasts  the  longest,  and  is  ultimately  the  controlling  factor  in 
speculation  as  in  investment. 

The  primary  mo\7ement  lasts  generally  from  four  to 
five  years.  Thus,  there  was  the  bull  movement  of  1877  to 
1881,  accompanying  the  resumption  of  specie  payments 
and  ending  in  the  assassination  of  Garfield.  This  was  fol- 
lowed by  the  bear  movement  of  1881  to  1885,  including 
the  panic  of  1884.  Then  there  was  the  bull  movement  of 
1885  to  1889,  when  the  sequence  was  broken  by  the  Baring 
panic  of  1890,  followed  quickly  by  an  upward  movement 
due  to  the  large  harvest  of  1891  and  a  currency  inflation. 
But  the  regular  sequence  was  resumed  in  1893,  when  the 
panic  set  in,  the  various  effects  of  which  continued  until 
1897.  Then  began  the  great  McKinley  boom,  based  on 
sound  money,  large  crops,  and  heavy  gold  production, 
which  has  lasted  five  years.  Now,  in  all  of  these  move- 
ments the  ultimate  prices  approached  very  closely  to  intrin- 
sic values.  But  in  every  one  of  them  there  were  long 
periods  of  time  when  the  secondary  movement — or  swing — 
was  at  work,  and  prices  varied  greatly  from  values. 

A  bicycle  rider  starts  out  for  a  long  trip  over  a  road 
never  before  traveled  by  him.  The  actual  distance  is 
20  miles,  but  his  cyclometer  at  the  end  registers  3<>.  This 
is  due  to  the  fact  that  he  has  not  traveled  in  a  straight 
line,  but  has  gone  from  one  side  of  the  road  to  the  other  in 
an  endless  succession  of  curves  in  order  to  avoid  teams  and 
ruts.  Then,  at  one  point  of  the  road  he  has  missed  his  way, 
or  has  been  maliciously  misdirected,  and  thus  went  four 
miles  before  he  discovered  his  mistake  and  turned  back. 
In  like  manner  prices  travel  through  an  endless  succession 
of  daily  curves  or  fluctuations,  and  sometimes  miss  the  road 
altogether,  and,  misled  by  manipulation,  travel  a  long  dis- 
tance astray,  but  in  the  end  they  arrive  at  the  true  destina- 
tion— value. 

Thus,  in  the  McKinley  boom,  the  price  of  stocks,  taking 
the  whole  period  of  the  movement  into  view,  corresponded 


VALUES  AND  PRICES  63 

with  the  actual  gain  in  value,  but  this  advance  in  prices 
was  accompanied  by  remarkable  fluctuations.  The  boom 
began  in  August,  1896,  when  Wall  Street's  fear  of  Bryan's 
election  on  a  free-silver  platform  came  to  an  end,  and  it 
reached  its  climax  at  the  time  of  the  Northern  Pacific  cor- 
ner and  panic  of  May  9,  1901.  During  this  period  of 
nearly  five  years  the  lowest  average  price  of  20  railroad 
stocks  was  less  than  42,  and  the  highest  average  price 
was  nearly  118  on  May  1,  1901,  a  difference  of  76,  the  per- 
centage of  advance  being  ISO.  This  upward  movement 
corresponded  very  closely  to  every  possible  test  of  value. 
For  instance,  bank  clearings  in  New  York  in  this  period 
increased  175  per  cent. 

But  in  the  case  of  railroad  stocks  the  best  measure  of 
value,  as  has  already  been  indicated,  is  the  surplus  earnings 
after  all  expenses,  taxes,  and  bond  interest  have  been  paid. 
The  rest  belongs  to  the  stock.  A  calculation  shows  that 
the  dividend-producing  capacity  of  all  the  railroads  of  the 
United  States  in  the  period  under  review  kept  pace  with 
this  advance  in  prices.  An  analysis  of  the  Interstate  Com- 
merce Commission  reports  for  the  years  ending  June  30, 
1896  and  1900,  shows  that  the  net  income  applicable  to 
dividends  increased  per  mile  from  $492  to  $1,180.  The 
dividends  actually  paid  increased  from  $484  to  S725  per 
mile.  Statistics  covering  exactly  the  period  of  the  stock 
boom  would  show  a  still  greater  rate  of  increase.  These 
figures  are  sufficient,  however,  to  indicate  how,  in  a  period 
of  five  years,  the  line  of  price  held  true  to  the  line  of 
value. 

The  speculator,  therefore,  who  studies  most  closely  the 
conditions  that  create  real  value,  and  bases  his  operations 
on  what  this  study  of  values  reveals,  is  most  likely  to 
achieve  success.  A  man  died  recently  worth  millions  of 
dollars  made  through  operations  in  copper,  coffee,  and 
ostrich-feathers — a  strange  combination,  truly,  but  his  suc- 
cess does  not  appear  strange  when  it  is  known  that  he  and 


64  THE  WORK  OF  WALL  STREET 

his  partners  made  the  most  exhaustive  study  of  these  three 
products,  so  that  there  was  nothing  worth  knowing  about 
them  that  they  did  not  know.  The  reason  why  so  many 
lose  money  in  Wall  Street  is  that  they  do  not  base  their 
operations  on  values,  but  on  chance  or  "  tips,"  and  they 
are  swept  out  of  sight  either  by  the  daily  fluctuations  or 
by  the  still  more  enduring  and  more  powerful  "  swings." 
The  secondary  and  tertiary  movements  of  prices  far  more 
than  the  primary  are  responsible  for  the  failures  of  Wall 
Street. 

In  this  very  McKinley  boom,  wrhen,  as  has  been  seen, 
the  difference  between  the  lowest  and  the  highest  prices 
was  76  points,  prices  actually  traveled  over  a  course  of  271 
points.  There  were  15  great  movements  and  swings  up- 
ward and  14  swings  downward,  the  lines  of  prices  con- 
tinually doubling  upon  themselves.  These  swings  were  of 
varying  durations.  Some  lasted  only  for  days,  and  some 
for  months.  The  period  between  April,  1899,  and  July, 
1900,  was  one  of  continuous  advance  in  the  income  ca- 
pacity of  the  railroads,  the  increase  being  from  $875  per 
mile  in  the  fiscal  year  of  1899  to  $1,180  in  the  fiscal  year 
of  1900  ;  and  yet  this  was  in  the  main  a  period  of  falling 
prices. 

For  more  than  a  year,  therefore,  the  line  of  price  sepa- 
rated from  the  line  of  value.  Overproduction  of  indus- 
trial securities,  the  sudden  death  of  Ex-Governor  Flower, 
then  the  bull  leader,  and  the  opening  of  the  Boer  War, 
involving  the  closing  of  the  Transvaal  mines,  and  the  presi- 
dential election,  were  mainly  responsible  for  this  separation. 
But  the  influence  of  value  reasserted  itself  as  soon  as  the 
Street  recovered  from  the  chill  of  these  events,  and  prices 
soon  regained  all  the  ground  they  had  lost. 

The  investor  can  afford  to  base  his  operations  entirely 
on  value,  but  the  speculator,  to  achieve  success,  must  not 
only  make  a  deep  study  of  values,  but  also  learn  to  calcu- 
late upon  the  force  and  duration  of  these  market  swings. 


VALUES  AND   PRICES  65 

Even  the  student  of  value  may  make  mistakes,  for  it 
should  not  be  forgotten  that  speculation  is  always  discount- 
ing the  future,  and  is  trading  on  values  to  be  established 
rather  than  on  values  that  are  already  established.  This 
accounts  for  the  familiar  phenomenon  of  a  stock  declining 
on  a  piece  of  good  news.  -  That  is  because  the  advance  has 
preceded  the  good  news — in  other  words,  discounted  it. 
The  insider,  or  the  far-sighted  outsider,  has  foreseen  the 
favorable  development  and  bought  in  advance  of  the  news. 
Then  when  the  thing  develops  and  the  news  is  announced 
he  sells  to  realize  his  profit,  thus  causing  a  decline. 

An  analysis  of  the  stock-market  reveals  a  mysterious 
law  of  averages.  The  great  primary  movements  based  on 
values  run  in  about  equal  periods  of  boom  and  depression. 
One  upward  sweep  is  followed  by  a  downward  sweep  of 
about  equal  length. 

There  have  been  constructed  in  Wall  Street  elaborate 
charts  or  systems  by  which  it  is  claimed  the  course  of 
prices  can  be  infallibly  foretold.  Men  who  use  these  sys- 
tems as  a  substitute  for  close  study  and  sound  judgment  of 
conditions  are  as  much  fools  as  the  young  nobleman  who 
some  months  ago  constructed  a  system  for  "  breaking  the 
bank "  at  Monte  Carlo,  and  succeeded  in  only  breaking 
himself.  But  not  a  few  houses  of  high  standing  have 
charts  showing  the  course  of  prices  through  a  series  of 
years,  and  use  them  as  the  man  of  business  uses  statistics. 
They  have  the  advantage,  for  one  thing,  of  showing  at  a 
glance  whether  prices  are  high  or  low  as  compared  with  pre- 
ceding periods.  It  has  been  shown  in  the  preceding  chapter 
how  in  the  course  of  ten  years  the  sales  of  the  bear  periods 
have  almost  balanced  the  sales  in  the  bull  periods.  A  chart 
has  been  made  of  those  ten  years  fashioned  like  a  checker- 
board, in  which  the  bull  periods  have  been  left  white  and 
the  bear  periods  made  black,  and  it  is  remarkable  that  the 
number  of  months,  almost  the  number  of  weeks,  of  ad- 
vancing prices  equals  the  number  of  months  and  weeks  of 


60  THE  WORK  OF   WALL   STREET 

declining  prices.  Prices,  therefore,  Lave  a  tendency  to  re- 
turn to  the  point  whence  they  started.  In  the  course  of  a 
year  there  is  apt  to  be  two  bull  and  two  bear  periods,  and 
the  two  highest  points  and  the  two  lowest  points  are  gen- 
erally about  six  months  apart. 

"Wall  Street,"  said  Jay  Gould,  "is  like  the  ocean. 
No  one  man  can  control  it.  It  is  full  of  eddies  and  cur- 
rents. The  thing  to  do  is  to  watch  them,  to  exercise  a 
little  common  sense,  and  on  the  wave  of  speculation  to 
come  in  on  top." 


CHAPTER  Y 

THE    STOCK   COMPANY 

IF  there  were  no  stock  companies  there  would  be  no 
stock-markets.  The  stock-certificate,  representing  as  it 
does  present  or  prospective  income,  is  therefore  the  very 
corner-stone  of  Wall  Street.  A  stock  company  is  an  asso- 
ciation incorporated  under  the  laws  of  some  State,  or  by 
the  direct  act  of  some  legislature,  for  the  purpose  of  trans- 
acting business.  It  is  composed  of  a  number  of  persons 
whose  share  in  its  capital  and  whose  interests  in  its  profits 
are  represented  by  shares  of  stock.  The  company  gives 
each  stockholder  a  certificate  showing  how  many  shares  he 
owns. 

In  a  legal  sense  the  corporation  is  a  person,  with  the 
same  powers  that  a  person  possesses  to  act  and  to  sue.  Yet 
the  persons  who  compose  the  corporations  have,  individu- 
ally, no  control  over  it  or  rights  on  the  property  it  may 
own.  A  contract  made  with  a  corporation  is  not  made 
writh  the  stockholders  individually.  The  corporation  there- 
fore is  a  person  without  personality.  Hence  the  aphorism 
that  "corporations  have  no  souls." 

Formerly  nearly  all  business  was  conducted  by  indi- 
viduals or  by  firms.  Xow,  however,  the  tendency  is  to 
convert  all  lines  of  business  into  corporations.  A  com- 
pany presents  many  points  of  advantage  over  a  partner- 
ship, not  the  least  being  that  it  gives  continuity  to  a  busi- 
ness. It  secures  what  is  called  a  perpetual  succession.  A 
partnership  usually  expires  by  limitation  in  a  certain  num- 

07 


68  THE  WORK  OF  WALL  STREET 

ber  of  years  or  by  the  death  of  a  partner.  A  company 
goes  on  without  a  break.  It  may  be  difficult  to  divide  a 
business  at  the  expiration  of  a  partnership  or  at  the  death 
of  one  of  the  partners,  but  the  death  of  a  shareholder 
causes  no  interruption  to  the  business  of  a  company,  and 
the  interest  of  the  deceased  is  easily  transferred  to  his  heirs 
or  sold  in  the  market  and  the  proceeds  divided  among 
them. 

Another  important  advantage  of  a  company  is  that  it 
provides  a  convenient  method  of  aggregating  capital  so 
as  to  be  able  to  conduct  business  on  a  large  scale.  A 
man  with  $10,000  is  incapable  of  any  extended  enter- 
prise, but  100  men  with  $10,000  each  represented  in 
a  stock  company  give  a  capital  of  $1,000,000.  A  firm 
with  !(>()  partners  would  be  a  monstrosity;  but  a  company 
with  100  or  1,000  stockholders  is  easily  and  effectively 
managed. 

The  control  of  a  company  is  vested  in  a  board  of 
directors,  usually  elected  annually  by  the  stockholders. 
These  directors  commonly  exercise  absolute  power,  only 
such  questions  as  a  proposed  increase  in  capital  being  sub- 
mitted to  a  direct  vote  of  the  stockholders,  and  sometimes 
they  do  not  even  decide  that.  The  board  of  directors  is, 
in  turn,  controlled  by  an  executive  committee,  and  this 
committee  is  not  infrequently  controlled  by  one  capitalist 
whose  interest  in  the  corporation  is  larger  than  that  of  the 
other  stockholders.  The  annual  meetings  are  usually  at- 
tended only  by  a  few  holders  of  stocks.  Elections  are 
decided  by  proxies  held  in  the  name  of  one  or  two  of  the 
managing  directors.  The  average  stockholder  carries  his 
stock  merely  for  the  dividends,  and  leaves  the  burden  of 
management  entirely  to  the  directors.  The  largest  stock- 
holder, as  has  been  said,  controls  the  corporation,  even 
though  his  individual  interest  may  be  less  than  an  actual 
majority  of  the  stock.  Recent  events  have  shown,  how- 
ever, that  absolute  ownership  of  a  majority  of  the  shares  is 


69 

essential  to  security  of  control.*  A  director  of  a  great  cor- 
poration whose  securities  are  listed  on  the  Stock  Exchange 
is  an  influential  individual,  with  sources  of  information 
and  opportunities  of  manipulation  denied  to  others.  He  is 
the  true  "  insider  "  of  the  stock-market. 

The  capital  stock  of  the  company  is  divided  into  de- 
nominations of  a  certain  specified  value,  as,  for  instance, 
$5,  $10,  $50,  or  $100.  Shares  of  $100  each  are  the  rule  in 
the  companies  represented  in  the  Stock  Exchange,  although 
there  are  notable  exceptions,  Heading  stock,  for  instance, 
being  divided  into  shares  of  $50  each. 

Certificates  of  stock  are  engraved  pieces  of  paper, 
signed  usually  by  the  president  and  the  treasurer  of  the 
company,  specifying  that  the  holder  whose  name  is  written 
on  the  certificate  is  the  owner  of  a  certain  number  of 
shares.  It  is  specified  that  the  shares  are  transferable  only 
on  the  books  of  the  corporation  in  person  or  by  attorney 
upon  surrender  of  the  certificate.  On  the  back  of  the  cer- 
tificate is  printed  a  blank  providing  for  the  transfer  of  the 
stock  upon  sale,  the  new  owner  being  constituted  an  attor- 
ney for  the  purpose  of  transfer.  In  Wall  Street,  certifi- 

*  There  has  been  more  than  one  instance  of  the  managers  of  a  corpo- 
ration, apparently  in  secure  control,  waking  up  suddenly  to  find  that 
the  majority  of  the  stock  has  been  bought  by  some  other,  and  perhaps 
rival,  interest.  How  to  safeguard  their  control  has  therefore  become  a 
problem  with  directors.  Claiming  that  "the  day  of  proxy  control  is 
passed,"  some  of  the  managers  of  great  railroad  and  industrial  corpo- 
rations are  scheming  to  make  their  control  absolute  and  safe  without 
being  compelled  to  lock  up  their  money  in  an  actual  ownership  of  a 
majority  of  the  stock.  They  want  to  control  the  property  and  still  be 
able  to  employ  their  capital  in  other  enterprises  or  speculations.  In  the 
recent  reorganization  of  the  Chicago,  Rock  Island  &  Pacific  Railroad  a 
device  of  this  kind  was  introduced.  The  control  of  the  road  was  given 
to  the  preferred  stock,  which  elects  a  majority  of  the  directors.  Capi- 
talists owning  one-half  of  the  preferred  stock,  or  $27.000.000,  can  there- 
fore control  a  company  whose  aggregate  common  and  preferred  stock 
amounts  to  $150,000.000.  This  plan  is  contrary  to  the  American  prin- 
ciple of  government  by  the  majority,  and  it  has  been  severely  criticized, 
although  it  is  upheld  and  accepted  by  a  number  of  prominent  capitalists. 


TO  THE  WORK  OF  WALL  STREET 

cates  of  stock  are  usually  made  out  for  100  shares,  the  bulk 
of  the  transactions  in  the  Stock  Exchange  being  in  100- 
share  lots.  A  man  may  own  10,000  shares,  but  he  will 
have  them  divided  into  100  certificates  of  100  shares  each 
for  convenience.  Odd-share  lots,  as,  for  instance,  certifi- 
cates representing  23  shares,  are  at  a  manifest  disadvantage 
in  speculation. 

The  rules  of  the  Stock  Exchange  require  that  certifi- 
cates of  stock,  as  well  as  every  bond,  must  be  printed  from 
steel  plates  engraved  in  the  best  manner  which  will  afford 
the  amplest  security  against  counterfeiting.  There  must  be 
two  steel  plates,  namely,  a  face-plate  containing  the  vign- 
ettes and  lettering  of  the  description  or  promissory  por- 
tion of  the  document,  which  should  be  printed  in  black  or 
in  black  mixed  with  a  color ;  and  a  tin  plate  from  which 
should  be  made  a  printing  in  an  antiphotographic  color, 
so  arranged  as  to  underline  important  portions  of  the  face 
printing.  The  two  printings  must  be  so  made  upon  the 
paper  that  the  combined  effect  of  the  whole,  if  photo- 
graphed, would  be  a  confused  mass  of  lines  and  forms,  so  as 
to  give  security  against  counterfeiting  by  scientific  or  other 
processes.  The  Exchange  requires  a  distinctive  plate  for 
100-share  certificates,  so  that  they  may  be  readily  distin- 
guished from  certificates  representing  other  amounts  of 
stock.  The  Exchange  also  requires  that  the  engraving 
shall  be  done  by  some  concern  approved  by  the  governing 
committee. 

In  the  formation  of  a  new  company,  the  "promoter" 
comes  first.  Many  imagine  the  promoter  to  be  a  recent 
development  of  Wall  Street.  He  has  indeed  enjoyed  spe- 
cial prominence  in  the  last  few  years,  because  of  the  im- 
mense number  of  new  companies  organized,  but  he  has 
existed  in  one  form  or  another  for  centuries.  Balzac  made 
a  promoter  the  chief  character  in  his  comedy  "  Mercadet," 
first  produced  in  1851. 

Of  course,  the  history  of  no  two  companies  is  exactly 


THE  STOCK  COMPANY  71 

the  same.  But  if  a  great  industrial  company  is  proposed, 
the  promoter  may,  in  general,  be  said  to  follow  one  of  two 
lines  of  procedure.  He  may  interest  the  different  manu- 
facturers in  a  certain  line  of  trade  and  induce  them  to 
combine,  and  if  successful  in  forming  a  combination,  he 
may  be  rewarded  with  a  large  interest  in  the  new  com- 
pany. Or,  being  satisfied  that  such  a  combination  would  be 
profitable,  he  may  obtain  options  for  the  purchase  of  the 
different  plants.  An  option  is  the  payment  of  a  certain 
sum  of  money  for  the  right  to  buy  a  plant  or  business,  or 
any  other  thing  of  value,  within  a  specified  time  and  at  a 
specified  figure.  If  the  option  is  not  used  within  the  time 
limit  the  promoter  loses  the  sum  he  paid  for  it. 

Whatever  line  of  procedure  is  adopted,  the  next  step  is 
to  secure  the  backing  of  some  banking-house,  the  larger 
and  more  influential  the  better.  The  banker  looks  into 
the  scheme  carefully,  and  with  the  aid  of  experts  and  ac- 
countants examines  the  different  plants,  surveys  the  pro- 
posed field  of  operations,  and  ascertains  the  present  and 
prospective  demand  for  the  product  to  be  marketed.  If 
satisfied  that  the  scheme  is  a  feasible  one,  the  banker 
undertakes  to  underwrite  it — in  other  words,  to  supply  the 
money  necessary  to  effect  the  combination,  organize  the 
company,  and  to  market  the  securities. 

At  this  stage  the  corporation  lawyer  is  called  in.  lie 
attends  to  all  the  legal  matters  involved  in  the  transaction, 
advises  as  to  the  State  the  company  should  be  incorporated 
in,  draws  up  the  necessary  papers,  and  sees  that  no  laws 
are  violated  and  that  every  legal  requirement  is  observed. 
The  plan  of  the  company  has  probably  been  laid  out  by 
the  promoter,  and  is  now  adopted  as  amended  by  the 
banker  and  his  lawyer.  The  amount  of  capital  is  deter- 
mined, and  the  division  of  capital  into  stocks  and  bonds  is 
fixed  upon. 

Then  comes  the  underwriting  syndicate.  The  banker 
may  be  unable  or  unwilling  to  provide  all  the  immediate 


72  THE   WORK  OF   WALL  STREET 

cash  required  and  assume  all  the  risk,  so  he  calls  in  other 
bankers  and  capitalists  and  a  syndicate  is  formed.  The 
company  having  been  incorporated,  it  is  likely  that  after  the 
persons  originally  concerned  in  its  organization  have  taken 
a  proportion  of  the  stock,  a  considerable  amount,  and  per- 
haps nearly  all,  remains  to  be  sold  to  the  public.  The 
banker,  if  his  reputation  is  high  and  his  connections  wide, 
is  usually  able  to  attend  to  this.  His  indorsement  may 
commend  the  securities  to  investors.  But  sometimes  the 
services  of  a  stock-market  manipulator  are  required  in 
order  to  prepare  the  market  to  absorb  the  new  supply  of 
stocks  and  bonds.  In  order  to  market  these,  it  is  necessary 
to  have  them  listed  in  the  Stock  Exchange.  Before  this 
can  be  done  they  are  probably  traded  in  on  the  curb.  The 
new  securities  now  get  into  the  hands  of  the  broker,  pass 
through  the  Stock  Clearing-IIouse,  are  hypothecated  for 
loans  at  the  banks,  and  finally  reach  the  investor,  who  locks 
them  up  in  his  safe-deposit  vault  and  waits  for  the  interest 
and  dividends. 

The  progress  of  a  certificate  of  stock  from  the  producer 
to  the  consumer,  from  the  organizer  to  the  investor,  may 
be  summed  up  as  follows  : 

1.  The  promoter. 
'    2.  The  banker. 

3.  The  corporation  lawyer. 

4.  The  underwriting  syndicate. 

5.  The  incorporation. 

6.  Issue  of  stock  certificates. 

7.  The  stock-market  manipulator. 

8.  The  curb  market. 

9.  Listed  on  the  Stock  Exchange. 

10.  The  stock-broker. 

11.  Hypothecated  for  loans  at  the  bank. 

12.  The  investor. 

In  the  case  of  railroad,  gas,  or  other  companies  requir- 
ing public  franchises  other  steps  have  to  be  taken.  To 


THE  STOCK  COMPANY  73 

build  a  railroad,  the  sanction  of  commissions,  courts,  and 
legislatures  must  be  obtained. 

Before  1892  the  majority  of  companies  were  incorpo- 
rated in  New  York,  but  since  then  New  Jersey  has  incor- 
porated more  than  any  other  State.  Nearly  one-half  of  all 
the  industrial  companies  represented  in  the  Stock  Ex- 
change have  New  Jersey  charters,  including  the  greatest 
corporation  ever  formed,  namely,  the  United  States  Steel 
Corporation,  with  a  capital  of  $1,018,000,000  stock  and 
$300,000,000  of  bonds.  The  Northern  Securities  Com- 
pany, with  $-400,000,000  capital  stock,  controlling  other 
companies  having  $642,000,000  of  outstanding  bonds,  is 
also  a  New  Jersey  corporation.  The  laws  of  that  State  are 
exceedingly  liberal  to  corporations.  The  New  Jersey 
company  is  required  to  maintain  an  office  within  the  State, 
this  office  to  contain  a  stock  transfer  book  and  a  stock 
ledger,  and  to  keep  open  in  business  hours  for  the  transfer 
of  stock ;  and  the  annual  meetings  of  stockholders  must  be 
held  there.  But  the  company  may  do  a  business  in  any 
part  of  the  world.  Its  directors  may  have  their  office  in 
Wall  Street,  and  its  factories  may  be  in  Boston  and  San 
Francisco. 

Moreover,  the  articles  of  incorporation,  if  well  drawn 
by  a  competent  lawyer,  can  give  the  company  power  to 
engage  in  almost  every  line  of  business.  It  may  manufac- 
ture carpet-tacks,  finance  trusts,  and  operate  railroads  all  at 
once.  Moreover,  if  nothing  is  said  to  the  contrary  in  the 
incorporation  papers,  the  company  becomes  a  perpetual 
corporation. 

If  stock  is  to  be  issued  for  plants  or  other  property,  the 
promoters  can  put  any  value  they  please  upon  the  property, 
and  authorize  the  issue  of  stock  in  payment ;  and  the  State 
of  New  Jersey  accepts  this  valuation  without  question. 
This  makes  stock  watering  easy.  Only  three  incorporators 
are  needed,  and  two  of  these  may  be  dummies,  and  the  in- 
terest of  all  three  in  the  concern  may  not  be  more  than 


74  THE   WORK  OF   WALL  STREET 

$1,000.  On  payment  of  an  incorporation  fee,  and  with  an 
initial  investment  of  only  $1,000,  three  men  can  in  one  day 
incorporate  a  company  in  New  Jersey  with  powers  to  do 
almost  anything  and  everything  under  the  sun.  It  is  not 
surprising  that  New  Jersey  has  grown  rich  from  the  incor- 
poration of  new  companies. 

James  B.  Dill,  the  well-known  lawyer,  who  is  noted  for 
the  number  of  companies  he  has  had  incorporated,  strongly 
recommended,  in  a  recent  address  in  Boston,  the  passage  of 
a  law  by  Congress  under  which  companies  could  obtain  a 
national  incorporation,  securing  certain  valuable  rights  from 
Congress  over  State-incorporated  companies,  but  also  being 
subject  to  a  certain  amount  of  governmental  supervision. 
This  he  advocated  as  meeting,  in  large  measure,  the  prob- 
lem of  the  trusts,  most  of  which  are  now  organized  under 
the  laws  of  New  Jersey,  which  permit  a  company  to  own 
the  stocks  of  other  companies. 

A  trust,  in  the  true  sense  of  the  word,  is  a  combination 
of  companies,  the  majority  stockholders  of  which  assign 
their  shares  to  a  certain  number  of  trustees,  giving  them 
an  irrevocable  power  of  attorney.  This  effective  form  of 
combination  has  gone  out  of  existence,  being  illegal  under 
the  Sherman  Antitrust  law.  The  Standard  Oil  Corpora- 
tion used  to  be  a  trust  of  this  kind,  but  has  now  become  a 
regularly  organized  company. 

The  word  trust  now  has  a  wider  significance.  Prof. 
J.  F.  Jenks  has  described  a  trust  as  "  a  combination  of  manu- 
facturing corporations  with  so  great  capital  and  power  as 
to  be  considered  by  the  public  to  have  become  a  menace  to 
its  welfare  and  to  have  temporarily,  at  least,  considerable 
monopolistic  power." 

A  more  precise  definition  is  that  adopted  for  the  pur- 
pose of  the  twelfth  census,  and  which  may  therefore  be 
accepted  as  an  official  definition.  This  defines  a  trust  to  be 
a  company  organized  to  own  and  control  a  large  number  of 
factories  or  mills  which  were  formerly  independent  of  each 


THE  STOCK  COMPANY  75 

other,  and  whose  business  extends  over  the  entire  country  ; 
or  else  a  company  organized  simply  for  the  purpose  of 
owning  and  holding  the  stocks  of  other  corporations,  but 
not  directly  owning  the  plants  or  carrying  on  the  business 
of  manufacturing.  Holding  companies  are  not  by  any 
means  a  new  thing.  There  are  several  that  have  been  in 
existence  for  many  years,  but  this  scheme  of  combination 
has  been  brought  into  special  prominence  by  the  recent 
organization  of  the  Northern  Securities  Company  for  the 
purpose  of  holding  the  stocks  of  the  Great  Northern  and 
Northern  Pacific  Railroads.  The  legality  of  this  combina- 
tion is  now  in  the  course  of  judicial  determination. 

Companies  have  been  organized  for  every  conceivable 
purpose.  Besides  the  two  main  Wall  Street  divisions  of 
railroads  and  industrials,  there  are  several  subdivisions,  as, 
for  instance,  franchise  companies,  including  ctreet-railways 
or  tractions,  telegraph,  gas,  etc. ;  manufacturing  companies  ; 
mining  companies ;  and  finance  and  holding  companies. 
Admitted  to  dealings  in  the  Stock  Exchange  are  the  secu- 
rities of  steam,  electric,  and  cable  railroads,  coal,  iron,  cop- 
per, express,  telegraph,  telephone,  electric-light  and  power, 
gas,  mining,  chemical,  bicycle,  cotton-oil,  spirits,  tobacco, 
snuff,  sugar,  paper,  match,  ice,  linseed-oil,  pump,  rope,  en- 
velope, rubber,  dry-goods,  land  improvement,  dock,  steam- 
ship, marble,  fuel,  locomotive,  woolen,  fireworks,  whisky, 
biscuit,  lead,  salt,  zinc,  leather,  pine,  bank-note,  flour,  corn- 
products,  and  ferry  companies.  In  the  outside  market 
there  are  dealings  in  other  kinds  of  companies,  including 
can,  refrigerating,  storage-battery,  lead-reduction,  securi- 
ties, carriage,  enameling,  elevator,  baking-powder,  potter- 
ies, coke,  writing-paper,  thread,  type,  rubber-tire,  electric- 
boat,  signal,  monotype,  bread,  stevedoring,  realty,  car-heat- 
ing, coupler,  and  typewriter.  Speculation  companies  have 
also  been  formed,  and  some  time  ago  a  corporation  was 
organized  by  creditors  to  take  over  the  business  of  an  em- 
barrassed merchant. 


76  THE   WORK  OF  WALL  STREET 

In  the  organization  of  companies  several  evils  Lave 
developed,  the  most  important  being  "stock  watering." 
This  is  the  very  felicitous  Wall  Street  term  for  fictitious 
capitalization.  It  has  been  said  by  bankers  who  ought  to 
know  that  most  of  the  large  industrial  companies  are  so 
vastly  overcapitalized  that  the  common  stock  represents 
"water"  or  no  actual  investment,  and  that  only  the  pre- 
ferred stock  represents  actual  investment.  This  assertion 
seems  to  be  confirmed  by  Bulletin  122  of  the  last  census. 
This  gives  the  amount  of  stocks  and  bonds  actually  issued 
by  183  industrial  corporations,  covered  by  its  report,  as 
$3,085,200,868,  while  the  true  value  of  the  capital  invested 
is  only  $1,458,522,573.  The  preferred  stock  of  these  com- 
panies was  $1,066,525,963,  slightly  less  than  the  true  value. 

In  capitalizing  a  new  combination  the  usual  rule  is  to 
capitalize  the  earning  capacity  rather  than  the  money  actu- 
ally invested  in  the  plant.  For  instance,  if  the  actual 
cost  of  a  plant  was  $1,000,000,  while  its  earning  capacity 
is  $300,000  a  year,  it  might  not  be  capitalized  at  cost, 
which  would  yield  30  per  cent  dividends,  but  at,  say, 
$3,000,000,  which  would  yield  10  per  cent.  It  may  be  said 
in  justification  that,  while  the  plant  may  have  cost  only 
$1,000,000,  its  true  value  should  be  measured  not  by  what 
it  cost,  but  by  what  it  earns,  and  that  the  capitalization  of 
$3,000,000  therefore  represents  value,  not  water. 

But  in  many  instances  the  plant  is  capitalized  not  on 
the  basis  of  what  it  earns,  but  what  it  might,  could,  or 
should  earn,  and  that  in  addition  the  capitalization  is 
swelled  by  the  bonuses  demanded  by  the  promoters  and 
bankers.  James  B.  Dill,  in  writing  on  this  subject,  has 
shown  how  plants  worth,  say,  $5,000,000  maybe  capitalized 
for  $30,000,000,  the  difference  representing  in  no  sense  of 
the  word  true  value,  but  simply  the  water  injected  into  the 
enterprise,  just  as  the  dishonest  dairyman  waters  his  milk. 
Then,  says  Mr.  Dill,  the  promoter  and  the  banker  sell  their 
stock  for  what  it  will  bring,  and  the  company  is  left  in  the 


THE  STOCK  COMPANY  77 

hands  of  stockholders  with  immense  charges  to  pay  on 
watered  stock.  Mr.  Dill  says  that  this  evil  could  be  pre- 
vented by  a  law  like  that  existing  in  England,  which  pro- 
hibits any  promoter  or  company  to  advertise  the  capital 
stock  for  sale  without  stating  the  actual  amount  paid  into 
the  company. 

The  industrial  commission  appointed  by  President 
McKinley  recommended  that  all  the  States  enact  laws  to 
prevent  stock  watering  like  those  existing  in  Massachu- 
setts. It  was  shown  by  evidence  produced  before  this 
commission  that  some  trusts  have  been  financed  on  this 
basis  :  For  every  $10  of  cash  or  tangible  property  secured 
$00  of  stock  was  issued,  representing  $15  to  the  promoter, 
$20  to  the  seller  entering  the  combination,  and  $25  to  the 
underwriting  syndicate. 

It  has  already  been  indicated  that  there  are  two  kinds 
of  stock,  preferred  and  common.  In  England  there  are 
also  founder  shares,  vendor  shares,  deferred  shares,  and 
debenture  shares,  but  these  are  practically  unknown  in  this 
country.  Preferred  stock  has  a  fixed  rate  of  dividend 
attached  to  it,  which  must  be  paid  before  the  common 
stockholders  can  receive  anything.  Such  dividends  may 
be  cumulative  or  non-cumulative.  If  cumulative,  any  divi- 
dend not  paid  this  year  must  be  paid  out  of  the  profits  of 
any  future  year.  The  dividends  accumulate  until  paid. 
Preferred  stock  differs  from  a  bond  in  that  it  is  not  secured 
by  a  mortgage  on  the  property,  while  the  holder,  in  the 
United  States,  generally  has  a  voice  and  vote  in  the  man- 
agement. The  preferred  stockholder  is  thus  not  a  creditor, 
but  a  preferred  partner  in  the  concern.  The  common 
stock  is  entitled  to  all  the  earnings  after  the  interest  on  the 
bonds  and  the  dividends  on  the  preferred  stocks  have  been 
paid.  Its  rate  of  dividend  thus  depends  on  the  profits  of 
the  company.  The  common  stock  is  therefore  the  specu- 
lative commodity  of  the  Street.  Preferred  stock  is  as  a 
rule  bought  for  investment,  and  common  stock  for  specu- 


78  THE  WORK  OF  WALL  STREET 

lation.  Many  companies  have  only  common  stock,  and 
common  stock  may  become  so  steadily  a  dividend  payer,  and 
thus  so  valuable,  that  it  enters  into  the  class  of  investment 
securities  and  is  no  longer  speculative. 

Bonds  represent  the  funded  debt  of  a  company,  and  are 
usually  secured  by  some  mortgage  on  its  property.  They 
are  of  various  kinds.  The  first -mortgage  bond  usually 
stands  highest,  in  that  it  has  a  first  lien  on  the  property 
covered  by  the  mortgage.  In  some  cases,  however,  prior- 
lien  bonds  are  issued,  and  these,  as  their  name  indicates, 
take  precedence.  Second-  and  third-mortgage  bonds  take 
rank  after  the  first.  Consolidated  bonds  is  a  name  usually 
given  for  bonds  issued  in  place  of  other  bonds,  the  various 
mortgages  being  consolidated.  This  operation  is  generally 
the  result  of  a  reorganization. 

There  are  various  classes  of  bonds  whose  names  indi- 
cate the  character  of  the  security  pledged  for  their  pay- 
ment. Thus,  equipment  bonds  are  secured  by  a  mortgage 
on  the  rolling-stock  of  a  railroad.  Land-grant  bonds  are 
secured  by  lands  owned  by  the  railroad,  and  are  redeemed 
by  the  proceeds  of  the  sale  of  the  lands.  Collateral  bonds 
are  secured  by  pledges  of  stocks  and  bonds  of  other  com- 
panies held  by  the  corporation  issuing  the  bonds.  Col- 
lateral bonds  have  become  very  prominent  in  the  Street, 
especially  in  the  last  few  years.  A  railroad  buys  control  of 
a  connecting  or  rival  line,  and  pays  for  the  same  bv  issuing 
bonds  secured  by  the  securities  of  the  line  thus  acquired. 
Income  bonds  are  virtually  unsecured,  and  pay  interest  only 
when  earned.  Debenture  bonds  are  very  common  in  Eng- 
land, and  are  becoming  more  so  in  this  country.  They  are 
practically  unsecured  pledges  to  pay.  They  are  similar  in 
principle  to  the  single-named  paper  of  a  merchant,  dis- 
counted by  a  bank.  Convertible  bonds  are  bonds  which 
can  be  converted  into  some  other  form  of  securitv,  usually 
stocks. 

Registered  bonds  are  bonds  recorded  on  the  books  of 


THE  STOCK  COMPANY  79 

the  corporation  in  the  names  of  their  holders  to  whom  the 
interest  is  sent.  Coupon  bonds  are  bonds  to  which  are 
attached  dated  certificates  representing  the  interest  due  on 
the  bond  at  the  regular  periods  of  payment.  These  may- 
be cut  off  from  the  bond  and  the  interest  collected  through 
the  bank  the  same  as  checks.  If  not  paid  they  may  be 
collected  by  suit,  the  same  as  the  principal. 

In  the  case  of  the  default  in  interest  the  bondholders 
can  foreclose  the  mortgage.  The  legal  forms  gone  through 
are  generally  the  same  as  those  in  foreclosing  the  mortgage 
on  a  house.  There  is,  however,  this  practical  difference  : 
the  house  is  actually  sold  to  satisfy  the  debt.  In  the  case 
of  a  railroad  there  is  a  reorganization — that  is  to  say,  a  gen- 
eral rearrangement  of  the  capitalization  on  a  basis  on  which 
the  company  can  pay  at  least  its  expenses  and  fixed  charges. 
In  this  reorganization,  the  first-mortgage  bondholders  en- 
joying the  highest  security  get  the  best  terms,  while  the 
stockholders,  to  save  their  interest  from  being  entirely 
wiped  out,  are  usually  subjected  to  an  assessment ;  they  are 
compelled  to  supply  most  or  all  of  the  needed  additional 
capital. 

The  great  bulk  of  the  bonds  traded  in  in  Wall  Street 
are  issued  by  railroads.  Industrial  companies,  however, 
are  beginning  to  issue  them  in  considerable  amount ;  and 
the  greatest  of  them  is,  at  the  time  this  is  written,  prepar- 
ing to  convert  a  part  of  its  preferred  stock  into  bonds. 

Out  of  the  gross  earnings  of  the  company  is  first  paid 
the  cost  of  its  operation.  Then  must  be  paid  the  fixed 
charges  which  are  the  interest  on  its  bonds  in  the  order  of 
their  standing.  Out  of  the  surplus  must  be  paid,  first,  the 
dividends  on  the  preferred  stock,  if  there  is  any.  What 
remains  is  applicable  to  the  payment  of  dividends  on  the 
common  stock,  but  the  directors  may  out  of  this  sum  use 
part  or  all  in  making  betterments  or  extensions.  This  pay- 
ment is  usually  in  such  a  case  charged  to  operating  ex- 
penses. Commonly,  however,  betterments  and  extensions 


80 

are  paid  for  by  new  issues  of  stocks  and  bonds,  it  being 
considered  legitimate  to  capitalize  improvements.  Divi- 
dends are  sometimes  paid  when  not  actually  earned.  The 
earnings  for  this  quarter  may  be  less  than  the  usual  divi- 
dend, yet  it  may  be  declared  either  because  the  earnings  of 
the  preceding  quarter  were  larger,  or  because  there  is  good 
reason  to  believe  that  the  earnings  of  the  succeeding  quar- 
ter will  be  more,  and  it  is  deemed  advisable  to  maintain 
the  same  rate.  But  where  the  dividends  of  a  whole  year 
are  larger  than  the  earnings  applicable  to  dividends,  it  is 
clear  that  a  debt  has  been  created  for  the  purpose,  and  it  is 
needless  to  say  that  an  increase  in  capitalization,  or  the  cre- 
ating of  a  floating  debt,  for  the  purpose  of  continuing  the 
payment  of  dividends  and  thus  sustaining  the  market 
price  of  the  stock,  is  illegitimate  finance. 


CHAPTER  YI 


LISTING    OF    SECUKITIES 


ACCORDING  to  an  English  authority,  the  United  States  is 
the  richest  nation  of  the  world,  its  wealth  being  estimated 
at  $81,000,000,000.  Nearly  one-fifth  of  this  sum  is  rep- 
resented by  the  securities  admitted  to  dealings  in  the  Stock 
Exchange.  In  1S6S  it  was  computed  that  the  stocks  and 

Listed  Stocks  and  Bonds 


Number. 


Amount. 


Railroad  stocks 173 

Manufacturing  and  industrial  stocks. ...  46 

Express-company  stocks 4 

Street-railway  stocks 10 

Miscellaneous  stocks 1!) 

Coal  and  iron  stocks 12 

Gas  and  electric-light  stocks 18 

Telegraph  and  telephone  stocks 10 

Bank  stocks 63 

Trust-company  stocks    5 

Special  list  (stocks  and  bonds) 28 

City  and  county  stocks  and  bonds 52 

Railroad  bonds 621 

Street-railway  bonds 30 

United  States  bonds 6 

Foreign  government  securities 3 

State  bonds 15 

Gas  and  electric-light  bonds 32 

Miscellaneous  bonds 22 

Manufacturing  and  industrial  bonds.  ...  19 

Coal  and  iron  bonds 15 

Telegraph  and  telephone  bonds 9 

Total 1,218 


$4,332,965,765 
1.648,154,900 

48,000,000 
193,297,700 
125,945,500 

75,240,400 
217.685,863 
229,053,125 

78.572,700 
500,000,000 

58,473.500 
113,515,179 
4,797,983.000 
184,184.000 
957,471.060 
119.528.600 

75.368.522 
149.267.500 

72,306.000 
231.476.000 

23,548.000 

54.829,000 


$13,791,866,317 


81 


82 


THE  WORK  OP  WALL  STREET 


bonds  traded  in  at  the  then  existing  two  boards  had  a  par 
value  of  $3,000,000,000.  To-day,  only  a  generation  later, 
the  par  value  of  the  stocks  and  bonds  admitted  to  the 
listed  and  unlisted  departments  of  the  Stock  Exchange 
aggregates  five  times  as  much — a  striking  proof  of  the 
marvelous  growth  of  the  country  in  that  time,  and  of  the 
rapid  conversion  of  all  forms  of  business  into  stock  com- 
panies. 

To  list  a  stock  is  to  have  it  admitted  to  the  right  of 
being  dealt  in  on  the  Exchange.  ~No  stock  or  bond  can  be 
bought  or  sold  there  which  has  not  first  been  admitted 
to  either  the  listed  or  unlisted  departments. 

The  table  on  page  81  is  a  complete  statement  of  the 
number  and  amounts  (par  value)  of  stocks  and  bonds  regu- 
larly listed  in  the  Stock  Exchange  on  January  30,  1902. 

In  the  unlisted  department  of  the  Exchange  there  are 
159  different  stocks  and  bonds  admitted  to  dealings.  The 
total  par  value  of  the  outstanding  securities  of  the  08  most 
prominent  of  these  is  as  follows : 

Unlisted  Securities 


Number. 

Amount. 

Railroad  stocks  

10 

$43,073,100 

Surface  railroad  stocks  and  bonds  (N.  Y.) 
Manufacturing  and  industrial  stocks..  .  . 
Mining  stocks  

8 
43 
1 

61,598,000 
929,646,945 

153,887,900 

Coal  and  iron  stocks  

2 

11,462,000 

Gas  stocks  

8 

20.051,700 

Telephone  stocks  

1 

7,500.000 

Total          

68 

$1,227,219,645 

Total  Listed  and  Unlisted  Securities 

Listed $13,791,866,317 

Unlisted 1.227,219,645 


Grand  total 15,019,085,962 

Estimated  amount  in  1868 3,000,000,000 


LISTING  OP  SECURITIES  83 

Practically  every  dollar  of  this  represents  American 
investments.* 

The  securities  admitted  to  trading  in  the  London  Stock 
Exchange  in  1901  had  a  par  value  of  more  than  $19,000,- 
000,000,  not  counting  about  $15,000,000,000  of  foreign 
Government  loans.  There  were  quotations  in  London  of 
nearly  4,000  different  securities,  representing  nearly  every 
country  on  the  globe.  On  the  18th  of  January,  1902,  there 
were  actual  sales  of  or  bids  for  7  Canadian  railway  securi- 
ties, 24  American  "rails,"  11  other  foreign  rails,  7  tele- 
graph and  telephone  companies,  27  foreign  government 
securities,  including  those  of  Argentina,  Brazil,  Bulgaria, 
Chile,  China,  Egypt,  France,  Germany,  Greece,  Hungary, 
Italy,  Japan,  Mexico,  Russia,  Spain,  Turkey,  and  Uruguay ; 
thirty -three  British  rails,  5  mining  stocks,  13  South  Afri- 
can exploration  stocks,  101  South  African  gold-mining 
stocks,  14  Rhodesian  stocks,  20  West  Australian  mining 
and  land  stocks,  13  Indian  rails,  11  American  railway  bonds, 
19  bank  stocks,  13  brewery  stocks,  8  canal  stocks,  64  com- 
mercial and  industrial  securities,  and  32  miscellaneous. 
Immense  as  is  the  Wall  Street  market,  it  is  thus  seen  how 
much  wider  in  scope  is  that  of  London. 

The  New  York  Stock  Exchange  does  not  guarantee  the 
value  of  any  security  which  it  admits  to  the  privileges  of  its 
floor.  It  neither  recommends  nor  condemns.  Each  in- 
vestor must  decide  for  himself  the  value  of  the  securities 
which  he  may  seek  to  buy.  The  Exchange  affords  an  open 
and  continuous  market,  but  makes  no  attempt  to  regulate 
either  its  prices,  so  as  to  make  them  conform  strictly  to  in- 
trinsic value,  or  the  management  of  corporations  whose 

*  In  August,  1902,  the  Stock  Exchange  listed  Russian  government 
bonds  to  the  amount  of  2,310,000,000  rubles.  This  is  the  beginning, 
evidently,  of  a  general  listing  of  foreign  government  securities.  Eng- 
lish consols  are  already  traded  in  in  Wall  Street,  and  certificates  repre- 
senting them  are  not  unlikely  to  be  listed.  It  will  not  be  long,  there- 
fore, before  New  York's  stock-market,  like  New  York's  money  market, 
will  be  international  in  scope. 


84          THE  WORK  OF  WALL  STREET 

stocks  and  bonds  may  be  listed  on  its  floor.  But  the  Ex- 
change has  certain  strict  rules  governing  the  admission  of 
securities  to  its  market,  and  investors  may  rely  upon  it 
that  these  rules  are  rigidly  enforced.  Whether  the  Ex- 
change goes  far  enough  in  its  regulations  for  the  listing  of 
securities  is  a  question  of  some  dispute,  but  as  far  as  it  goes 
it  is  scrupulous  in  enforcement. 

The  Exchange  divides  its  market  into  two  departments, 
listed  and  unlisted.  The  former  is  by  far  the  more  im- 
portant, and  the  rules  that  must  be  complied  with  in  order 
to  secure  admission  to  it  are  worthy  of  some  study,  for 
there  is  no  other  branch  of  Wall  Street  mechanism  in  re- 
gard to  which  there  is  more  popular  misconception  than 
this.  It  is  important  for  the  investor  to  know  what  safe- 
guards the  Exchange  throws  around  its  market.  It  will  be 
found  that  they  are  numerous. 

The  constitution  of  the  Exchange  provides  that  there 
shall  be  a  committee  on  stock  lists  to  consist  of  five  mem- 
bers, to  which  shall  be  referred  all  applications  for  placing 
securities  on  the  list.  It  is  further  provided  that  all  secu- 
rities placed  upon  the  list  must  be  with  the  consent  of  the 
Governing  Committee,  and  only  after  report  made  by  the 
Stock  List  Committee  to  the  Governing  Committee,  "  with 
a  full  statement  of  capital,  number  of  shares,  resources,  etc." 
Thus  a  security  to  be  admitted  to  the  list  must  pass  the 
scrutiny  of  two  committees,  one  of  them  the  supreme  gov- 
erning power  of  the  Exchange. 

The  Stock  List  Committee  has,  under  this  constitutional 
provision,  drawn  up  a  definite  statement  of  just  what  it  re- 
quires of  all  applications  to  list.  It  is  provided  in  the  case 
of  a  railroad  company  that  there  shall  be  filed  a  statement 
of  the  location  and  description  of  the  property,  and,  when 
possible,  also  a  map  thereof.  This  statement  should  give 
the  title  of  the  company,  when  it  was  organized,  and  bv 
what  authority,  the  route  of  road,  the  miles  of  road  com- 
pleted and  in  operation,  contemplated  extensions,  equip- 


LISTING  OF  SECURITIES  85 

ment,  liabilities  and  assets,  earnings,  amount  and  descrip- 
tion of  mortgage  lien  or  other  indebtedness.  Also  a  state- 
ment of,  and  liability  for,  any  leases  guaranteed,  rentals 
or  car  trusts  and  terms  of  payment  thereof.  Also  the 
number  of  shares  of  capital  stock  authorized  and  its  par 
value,  a  list  of  officers  and  directors,  the  office  of  the  com- 
pany, the  transfer  office  and  registrar,  together  with  their 
names. 

In  the  case  of  bonds  only  issues  upon  completed  mile- 
age will  be  listed.  The  application  must  state  the  amount 
authorized,  the  date  of  issue  and  maturity,  the  names  of 
trustees,  the  par  value,  the  rate  of  interest,  whether  subject 
to  earlier  redemption  by  sinking-funds  or  otherwise,  and 
whether  convertible  into  other  forms.  A  copy  of  the 
mortgage  duly  certified  is  required,  and  proof  that  the 
mortgage  has  been  duly  recorded  is  insisted  upon.  The 
application  must  be  accompanied  by  a  balance-sheet  and 
statement  of  income  account  of  recent  date. 

In  the  case  of  a  reorganized  company,  the  Exchange 
requires  a  complete  financial  statement  for  a  period  of  at 
least  one  year  prior  to  reorganization,  the  receipts  and  ex- 
penditures in  detail,  a  balance-sheet,  and  a  description  of 
the  new  security  issued.  This  requirement  was  first  made 
in  February,  1805,  and  materially  strengthened  the  rules 
for  listing.  The  Exchange  recommends  that  a  trust  com- 
pany should  be  appointed  as  a  trustee  of  each  mortgage  or 
trust  deed.  "When  an  industrial  or  manufacturing  com- 
pany applies  for  the  listing  of  its  securities,  it  must  submit 
the  opinion  of  counsel  that  it  has  been  legally  organized 
and  its  securities  legally  issued.  If  the  company  is  the 
result  of  a  consolidation — in  other  words,  a  trust — a  state- 
ment must  be  submitted  of  the  financial  and  physical  con- 
dition of  the  constituent  companies ;  a  full  description  of 
the  real,  personal,  and  leased  property  ;  proof  that  real 
estate  is  free  and  clear  except  as  to  stated  liens ;  a  report 
of  responsible  expert  accountants  showing  results  of  busi- 


86  THE  WORK  OF  WALL  STREET 

ness  each  year  for  at  least  two  consecutive  years,  if  possi- 
ble ;  a  balance-sheet ;  statement  of  the  powers  of  the 
directors  under  the  charter ;  an  agreement  that  the  com- 
pany will  not  dispose  of  its  stated  interest  in  the  constitu- 
ent companies  except  on  direct  authorization  of  stockhold- 
ers ;  and  that  it  will  publish  at  least  once  in  each  year  a 
properly  detailed  statement  of  its  income  and  expenditures 
of  the  preceding  year,  and  also  a  balance-sheet  at  the  end 
of  its  last  fiscal  year.  The  Exchange  requires  that  all 
active  stocks  must  be  registered  at  some  satisfactory  insti- 
tution, and  the  registrar  must  state  the  amount  of  stock 
registered  at  the  time  of  application. 

Having  made  these  and  other  requirements,  the  Stock 
List  Committee  makes  the  following  recommendation  : 

"  The  Exchange  recommends  to  the  various  corporations 
whose  securities  are  here  dealt  in,  that  they  shall  print, 
publish,  and  distribute  to  stockholders,  at  least  fifteen  days 
prior  to  annual  meetings,  a  full  report  of  their  operations 
during  the  preceding  fiscal  year ;  together  with  complete 
and  detailed  statements  of  all  income  and  expenditures, 
and  a  balance-sheet  showing  their  financial  condition  at  the 
close  of  the  given  period.  The  Exchange  requests  that 
stockholders  of  the  several  corporations  take  such  action  as 
may  be  necessary  for  the  accomplishment  of  this  recom- 
mendation." 

While  not  mandatory,  this  recommendation  has  almost 
the  force  of  law. 


CHAPTER  VII 

THE    UNLISTED    DEPAKTMENT 

MANY  companies,  especially  the  industrial,  are  unable 
or  unwilling  to  comply  with  all  the  requirements  necessary 
for  the  listing  of  securities.  But  their  promoters  and  offi- 
cers are  eager  for  a  market  for  their  securities,  and  there 
may  be  an  equally  eager  demand  for  them.  If  the  Ex- 
change did  not  provide  such  a  market  the  securities  would 
be  traded  in  on  the  curb  or  in  another  Exchange.  The 
Stock  Exchange  therefore,  in  1885,  established  what  is 
known  as  the  "  Unlisted  Department."  There  had  been  at 
that  time  a  severe  depreciation  in  the  values  of  railroad 
and  coal  stocks,  so  that  the  attention  of  investors  was 
turned  to  other  classes  of  securities.  Industrial  and  manu- 
facturing stocks  came  to  the  front,  and  were  actively  traded 
in  outside  of  the  Exchange,  and  to  secure  the  business  for 
its  members  and  to  give  to  it  the  security  of  a  regulated 
market  the  Exchange  created  this  new  department  of  un- 
listed securities.  Its  business  developed  rapidly,  as  railroad 
stocks  were  then  unpopular,  though  now  they  have  re- 
covered their  preeminence  in  the  market. 

Unlisted  stocks  are  traded  in  on  the  Exchange  under 
practically  the  same  conditions  as  the  listed  securities.  The 
tape  records  their  sales  and  prices  the  same  as  those  of  the 
listed,  and,  so  far  as  the  general  public  is  concerned,  it 
rarely  takes  account  of  whether  the  security  is  in  one  class 
or  the  other,  although  some  of  the  newspapers,  to  indicate 

87 


88  THE  WORK  OF   WALL  STREET 

the  distinction  between  them,  put  an  asterisk  before  the 
name  of  each  unlisted  stock. 

There  is,  in  fact,  a  wide  difference  between  listed  and 
unlisted  securities.  The  former  have  a  much  higher  stand- 
ing at  the  banks,  and  when  the  owner  or  broker  borrows 
money  on  securities  he  finds  that  the  listed  is  accepted  as 
much  more  valuable  collateral.  For  this  reason  most  cor- 
porations prefer  to  put  their  securities  on  the  regular  list, 
notwithstanding  the  stricter  requirements.  Moreover,  the 
transactions  in  unlisted  securities  are  less  than  one-fifth  of 
those  in  the  listed.  In  1901  there  were  210,113,239  shares 
of  stocks  and  $828,412,300  par  value  of  listed  bonds  traded 
in,  while  in  the  unlisted  class  the  transactions  were  42,413,- 
108  shares  of  stock  and  $90,508,000  par  value  of  bonds. 

That  the  Stock  Exchange  requirements  for  admission  to 
the  unlisted  department  are  much  less  strict  than  its  re- 
quirements for  listed  is  shown  by  the  blank  on  the  opposite 
page,  which  must  be  filled  out  by  the  company  applying  for 
such  admission. 

With  the  rapid  development  of  industrial  companies  in 
the  past  ten  years  the  speculation  in  unlisted  stocks  has 
largely  increased,  and  thus  has  arisen  a  demand  for  more 
information  regarding  the  financial  conditions  and  earnings 
of  these  companies,  some  of  which  have  issued  no  state- 
ment of  earnings  in  years.  For  instance,  the  American 
Sugar  Refineries  Company,  whose  common  stock  is  gener- 
ally the  most  active  security  of  the  unlisted  department, 
its  sales  in  1901  having  exceeded  S, 000,000  shares,  has 
issued  no  such  statement  in  ten  years  ;  yet  it  has  paid 
from  G  to  2H-  per  cent  a  year  in  dividends  all  that  time. 
The  Standard  Oil  Company  is  another  of  the  so-called 
"blind-pool"  corporations,  in  which  shareholders  are  fur- 
nished with  little  or  no  information  regarding  its  affairs. 
But  this  stock,  although  not  traded  in  in  either  department 
of  the  Exchange,  is  one  of  the  two  or  three  highest  priced 
stocks  in  the  United  States,  and  has  paid  in  five  years  and 


COMMITTEE    ON     UNLISTED    SECURITIES 
In  re  Applications  for  Quotation  in  Unlisted  Department 

Name  of  corporation, 

Incorporated  under  the  laws  of  the  State  of 

Date  of  Incorporation, 

Authorized  Capital, 

Preferred  (Cumulative  or  Non-Cumulative,        %),  $ 

State  nature  of  preference  of  Preferred  over  Common  Stock  in  regard 
to  voting,  dividends,  and  assets. 

Common, 

Amount  of  each  outstanding, 

Par  value  of  shares,  Preferred,  $  each. 

"        Common,    §  each. 

Full  paid. 

Personal  liability. 

Transfer  Agent,  New  York, 
"      elsewhere, 

Registrar,  New  York, 
"          elsewhere, 

State  if  certificates  issued  elsewhere  can  be  discharged  in  New  York. 

State  how  generally  stock  is  distributed,  give  about  number  of  stock- 
holders, and  that  the  revenue  (on  new  issues)  has  been  paid. 

/  Give  particulars — Date  of  maturity.     Rate  of  interest. 

Bom!ed.  \  Amount  authorized, 

indebtedness  ) 

I  Amount  outstanding. 

Bonded   indebtedness   of   constituent   companies  (with  particulars  as 

above). 
State  if  constituent  companies  are  owned  in  fee;  if  not,  give  amounts  of 

various  constituent  companies'  stocks  owned,  also  amount  authorized. 
Balance-sheet  last  issued,  if  of  recent  date. 
Give  history  of  corporation,  and  if  composed  of  old  companies  ;  name 

them;  list  of  plants,  buildings,  acreage  and  where  located;  nature  of 

business  conducted. 

Board  of  Directors,  give  address  (city  only).     If  in  classes,  show  them. 
List  of  Officers. 

Furnish  sample  of  each  kind  of  stock-certificates. 
Letter  accepting  Transfer  Agency  from  Transfer  Agent. 
"      from  Registrar  accepting  office. 
"      from  Counsel  in  re  legality  of  incorporation. 
Certified  copy  of  Charter  and  By-Laws. 

(Please  furnish  four  copies  of  application  ;  only  one  need  be  signed.) 

89 


90  THE  WORK  OF  WALL  STREET 

a  quarter  $202,000,000,  or  more  than  double  the  par  value 
of  its  outstanding  capital  stock.  Other  companies  far  less 
substantial  than  these  follow  their  example  in  withholding 
information  of  their  operations  from  the  public. 

Publicity  has  therefore  become  a  popular  cry.  It  is 
urged  as  a  check  upon  such  evils  as  attend  the  creation  of 
industrial  corporations  of  immense  capital  and  power,  and 
it  may  be  of  watered  stock.  President  Roosevelt  in  his 
last  annual  message  said : 

"  The  first  essential  in  determining  how  to  deal  with 
the  great  industrial  combinations  is  knowledge  of  the  facts 
—publicity.  In  the  interest  of  the  public,  the  Govern- 
ment should  have  the  right  to  inspect  and  examine  the 
workings  of  the  great  corporations  engaged  in  interstate 
business.  Publicity  is  the  only  sure  remedy  which  we  can 
now  invoke.  What  further  remedies  are  needed  in  the 
way  of  governmental  regulation,  or  taxation,  can  only  be 
determined  after  publicity  has  been  obtained,  by  process  of 
law,  and  in  the  course  of  administration.  The  first  requi- 
site is  knowledge,  full  and  complete — knowledge  which 
may  be  made  public  to  the  world." 

Bishop  Potter,  looking  at  the  subject  from  the  stand- 
point of  a  religious  teacher,  in  a  recent  address  urged  that 
corporations  should  be  compelled  to  make  monthly  reports 
attested  by  oath  ;  should  be  subject  to  periodical  investiga- 
tions by  Government  experts  ;  and  their  officials  be  pro- 
hibited under  heavy  penalties  from  speculating  in  the 
stocks  of  their  own  companies  either  directly  or  indirectly. 


CHAPTER  VIII 

THE   NEW   YOEK    STOCK    EXCHANGE 

IT  has  been  seen  that  with  the  creation  of  new  forms  of 
indebtedness,  either  in  the  shape  of  national,  State,  and 
city  bonds,  or  in  the  shape  of  stocks  and  bonds  of  banks, 
railroads  and  industrial  companies,  there  has  naturally  de- 
veloped a  market  for  the  buying  and  selling  of  these  se- 
curities. Wherever  this  stock-mai'ket  becomes  of  large 
extent  it  is  necessary  to  establish  a  stock  exchange.  Stock 
exchanges  now  exist  in  every  large  city  of  Europe  and 
America. 

The  New  York  Stock  Exchange  is  an  unincorporated 
association  of  1,100  members,  organized  for  the  purpose  of 
supplying  a  continuous  and  regulated  market  for  the  buy- 
ing and  selling  of  stocks  and  bonds.  "  Its  objects,"  says 
the  new  constitution  adopted  in  March,  1902,  "shall  be  to 
furnish  exchange  rooms  and  other  facilities  for  the  con- 
venient transaction  of  their  business  by  its  members  as 
brokers ;  to  maintain  high  standards  of  commercial  honor 
and  integrity  among  its  members ;  and  to  promote  and  in- 
culcate just  and  equitable  principles  of  trade  and  busi- 
ness." 

The  Exchange  faithfully  carries  these  objects  into  effect. 
No  other  financial  institution  or  corporation  is  better  man- 
aged. It  has  evolved  an  almost  perfect  mechanism  for  the 
conduct  of  its  vast  business.  Whatever  may  justly  be  said 
of  the  methods  of  the  stock-market,  its  manipulation, 
tricks,  and  deals,  no  serious  criticism  can  be  made  of  the 

91 


92  THE  WORK  OP  WALL  STREET 

Stock  Exchange,  which  insists  upon  honorable  dealings 
between  its  members  and  between  its  members  and  their 
customers.  A  member  guilty  of  fraud  is  expelled.  A 
member  unable  to  fulfil  his  contracts  is  suspended.  The 
Exchange  enforces  strictly  its  elaborate  laws  for  the  listing 
of  securities  and  for  the  sale  and  delivery  of  stocks.  It 
has  been  urged  that  the  Exchange  might  go  a  step  or  two 
further,  and  use  its  power  to  strike  from  the  list  the  secu- 
rity of  every  company  whose  management  discloses  crook- 
edness of  any  kind  or  refuses  proper  information  of  its 
financial  condition,  and  to  visit  with  some  form  of  punish- 
ment every  form  of  manipulation.  But  it  is  said  in  reply 
that  it  now  goes  as  far  in  that  direction  as  it  feels  that  it 
has  the  right  to  go,  and,  moreover,  that  it  establishes  almost 
every  year  some  new  safeguard  against  dishonest  and  reck- 
less speculation.  There  is  certainly  a  limit  to  its  powers 
and  responsibilities. 

John  R.  Dos  Passos,  who  is  an  acknowledged  authority 
on  the  law  of  Wall  Street,  holds  that  it  seems  entirely  rea- 
sonable "  to  confine  and  limit  the  jurisdiction  of  the  Stock 
Exchange  to  those  matters  which  arise  between  its  mem- 
bers in  the  course  of  their  business  with  each  other  as  bro- 
kers ;  otherwise  its  judicial  powers  might  be  extended  to 
embrace  every  affair  of  human  life,  which  was  never  in- 
tended, and  which  the  law  would  not  permit." 

In  1869,  after  the  consolidation  of  the  Stock  Exchange, 
the  Open  Board  of  Brokers,  and  the  Government  Bond 
Department,  the  membership  of  the  united  body  was  1,060, 
but  ten  years  later  40  additional  memberships  were  created 
and  sold  to  defray  the  cost  of  an  enlargement  of  the  Board 
room.  Since  then  there  has  been  no  increase  in  member- 
ship, and  the  constitution  provides  that  there  shall  be  no 
increase  except  by  the  action  of  the  Governing  Committee 
subject  to  approval  by  a  majority  of  the  members. 

AVhile  located  in  Xew  York,  the  Exchange  is  actually 
a  national  institution.  There  are  stock  exchanges  in 


THE  NEW  YORK  STOCK  EXCHANGE  93 

Philadelphia,  Boston,  Pittsburg,  Chicago,  St.  Louis,  and 
other  cities,  hut  these  are  local  institutions,  and  their  mar- 
kets restricted  for  the  most  part  to  dealings  in  local  stocks. 
But  the  New  York  Stock  Exchange  deals  in  the  securities 
of  the  entire  nation,  and  its  membership  represents  many 
different  parts  of  the  country.  There  were,  in  1901,  119 
out-of-town  members,  including  26  of  Philadelphia,  20  of 
Chicago,  and  25  of  Boston.  St.  Louis,  Baltimore,  St.  Paul, 
Buffalo,  Rochester,  Milwaukee,  Kansas  City,  Detroit,  Rich- 
mond, Washington,  and  other  cities  are  represented  in  the 
membership. 

Many  of  the  members  maintain  branch  offices.  These 
numbered  2-iO,  one-half  of  them  being  in  New  York  city 
itself,  but  130  were  scattered  among  50  different  cities  and 
towns  in  the  United  States  and  Canada.  There  is  a  branch 
house  as  far  West  as  Denver,  and  another  as  far  North  as 
Toronto.  One  firm  maintains  as  many  as  9  branch  offices. 

The  1,100  members  of  the  Exchange  represent  44-8 
firms,  in  which  there  are  1,31-1  partners.  Usually  a  firm 
is  content  to  have  only  1  partner  in  the  Exchange,  but 
there  are  many  which  have  2  or  3,  and  there  is  one  firm  of 
0  partners,  every  one  of  whom  is  a  member  of  the  Board. 

It  does  not  follow  that  because  there  are  1,100  members 
they  are  all  brokers.  As  a  matter  of  fact,  only  a  part  of 
them  are.  Among  the  members  are  such  great  capitalists 
as  John  D.  Rockefeller,  William  Rockefeller,  George  J. 
Gould,  Edwin  Gould,  Frank  J.  Gould,  Howard  Gould, 
E.  H.  Ilarriman,  and  Russell  Sage,  men  who  never  execute 
an  order  on  the  floor,  and  who  rarely,  if  ever,  are  seen 
there.  These  men  employ  brokers.  They  are  principals. 
Membership  in  the  Exchange  gives  them  the  advantage  of 
a  lower  rate  of  commission  than  they  could  command  as 
outsiders. 

Their  memberships  represent  to  each  of  them  in  inter- 
est on  market  price  of  seats  and  annual  dues  an  expendi- 
ture of  $3,250  a  year,  but  they  undoubtedly  save  more 


U±  THE  WORK  OF  WALL  STREET 

than  that  in  commissions.  There  are  others,  like  "W.  E. 
Connor,  formerly  active  brokers,  but  who  now  have  joined 
the  class  of  principals.  There  are  other  members,  heads 
of  large  banking  or  commission  houses,  who  are  seldom 
seen  on  the  floor,  but  intrust  the  interests  of  their  firms 
there  to  junior  partners.  Moreover,  many  of  the  most 
prominent  men  in  the  Street  are  not  members  of  the  Ex- 
change. J.  Pierpont  Morgan  is  not  a  member,  but  his  son 
of  the  same  name  is.  Although  James  R.  Keene  is  one  of 
the  most  noted  stock  operators  in  the  Street,  he  is  not  a 
member. 

It  is  estimated  that  the  members  and  their  employees 
form  an  army  of  at  least  15,000  workers.  There  are  many 
members  who  maintain  no  offices  of  their  own  but  clear 
their  business  through  other  members.  There  are  a  num- 
ber of  houses  which  confine  their  business  to  clearing  for 
this  class  of  members.  Then  there  are  other  members  who 
serve  as  brokers  for  brokers.  They  constitute  the  large 
class,  estimated  to  number  250,  of  what  are  called  "two- 
dollar  brokers  r' — that  is  to  say,  they  execute  orders  for  other 
brokers  at  the  low  but  legal  rate  of  $2  per  100  shares. 
The  same  business  would  cost  an  outsider  $12.50. 

There  is  another  class  of  members  who  are  known  as 
"  Room  traders."  These  do  not  execute  orders  for  others, 
but  buy  and  sell  for  their  own  account  alone.  Most  bro- 
kers speculate  for  their  own  account  to  some  extent, 
although  many  make  it  a  rule  to  confine  themselves  to  a 
strict  commission  business.  But  Room  traders  are  profes- 
sional speculators,  who  act  at  the  same  time  as  principals 
and  agents — that  is  to  say,  they  execute  their  own  orders. 
There  are  between  50  and  100  of  these  Room  traders  who 
enjoy  the  privilege  of  being  all  the  time  on  the  floor  of  the 
Board  room,  and  thus  able  to  take  advantage  at  once  of 
every  opening.  They  know  the  prices  even  before  they 
are  recorded  on  the  tape,  and  they  are  able  to  join  in  every 
upward  movement  the  moment  it  begins,  and  to  abandon 


THE  NEW  YORK  STOCK  EXCHANGE  95 

it  the  moment  it  shows  signs  of  wavering.  They  are  in 
and  out  of  the  market  perhaps  a  dozen  times  a  day.  They 
constitute  an  important  element  in  it. 

There  is  still  another  class  of  members.  They  are 
"  Specialists  " — that  is,  brokers  who  make  a  specialty  of  one 
or  two  or  three  securities  alone,  these  securities  being  usu- 
ally of  the  investment  class,  requiring  close  and  expert 
attention.  The  business  of  these  specialists  is  also  largely 
with  other  brokers.  It  will  thus  be  seen  that  the  number 
of  brokers  who  act  directly  as  agents  for  outside  traders 
forms  less  than  one-half  of  the  Stock  Exchange  member- 
ship. The  average  attendance  on  the  floor  of  the  Exchange 
is  between  500  and  COO. 

Membership  in  the  Exchange  being  limited  to  1,100, 
admission  is  obtainable  only  when  there  is  a  vacancy. 
Membership  is  secured  through  purchase  of  the  "  seat "  of 
a  deceased  or  insolvent  member,  or  of  some  one  who  de- 
sires to  retire  from  business.  The  application  is  passed 
upon  by  a  Committee  on  Admissions  composed  of  15  mem- 
bers. This  committee  has  full  power  of  election,  but 
there  must  be  10  affirmative  votes.  The  applicant  must  be 
of  legal  age  and  a  citizen.  lie  must  pay  an  initiation  fee 
of  $1,000  in  addition  to  the  cost  of  his  seat.  Xo  certificate 
or  other  evidence  of  membership  is  issued. 

The  word  "  seat "  as  applied  to  a  membership  is  an  in- 
heritance of  the  old  days  when  the  brokers  had  individual 
seats  in  the  Board  room,  like  Senators  in  a  Senate  chamber. 
There  are  no  such  seats  now  in  the  Board  room,  and  very 
few  chairs  of  any  kind.  The  brokers  are  too  busy  to  sit 
down.  Every  member  has  the  right  to  transfer  his  mem- 
bership subject  to  the  approval  of  the  Committee  on 
Memberships.  "With  that  approval  he  may  sell  it.  If 
he  dies,  the  committee  sells  it  and  pays  the  proceeds  to 
his  heirs  after  payment  of  any  outstanding  claims  of  the 
Exchange  or  of  the  members  thereof.  If  he  fails,  the 
seat  is  sold  for  the  benefit  of  his  creditors,  but  members 
8 


96  THE   WORK   OF   WALL  STREET 

of  the  Exchange  having  claims  upon  him  have  a  first  lien 
upon  it. 

Membership  in  the  Exchange  is  an  asset  of  large  value. 
The  price  of  seats  varies,  like  the  prices  of  stocks,  although 
not  so  volatile.  The  price  is,  however,  a  fair  indication  of 
the  activity  of  the  stock-market  in  any  given  year.  There 
are  a  few  old  members,  who  joined  thirty-five  or  forty 
years  ago,  who  paid  only  $500  for  their  seats.  In  1871 
seats  were  sold  as  low  as  $2,750.  In  the  boom  year  of 
1882  the  price  reached  $32,500.  Two  years  later,  in  the 
panic,  the  price  fell  to  $20,000.  The  next  year,  however, 
it  reached  $31,000,  and  this  remained  the  highest  price  for 
many  years.  In  the  panic  of  1893  memberships  were 
quoted  at  $15,250,  and  in  1896  as  low  as  $13,000.  Since 
then  there  has  been  a  rapid  advance,  until  in  the  last  week 
of  1901  sales  were  made  at  $80,000.  At  this  price  the 
total  value  of  Stock  Exchange  seats  amounted  to  $88,000,- 
000.  In  1902  the  price  fell  to  $60,000,  and  later  advanced 
to  $70,000.  To  the  price  of  the  seat  must  be  added  the 
initiation  fee.  The  number  of  membership  transfers  varies 
from  40  to  100  a  year.  One  reason  for  the  advance  in 
price  in  the  last  few  years,  apart  from  the  great  growth  in 
business,  is  the  demand  from  out-of-town  brokers  seeking 
entrance  in  the  Exchange,  and  the  demand  from  rich  men 
in  behalf  of  their  sons  whom  they  wish  to  set  up  in  a  gen- 
teel business. 

Something  more  than  wealth,  however,  is  required  in 
the  applicant.  lie  must  be  of  good  business  reputation, 
and  must  have  no  alliances  that  would  bring  discredit  on 
the  Exchange.  To  a  member  who  formed  a  partnership 
with  a  man  guilty  of  dishonorable  practises  on  Black  Friday 
was  given  several  years  ago  the  alternative  of  giving  up  the 
partnership  or  his  seat  in  the  Exchange.  He  gave  up  the 
partnership.  A  member  who  fails  must  immediately  in- 
form the  president,  and  is  suspended  until  such  time  as  he 
is  able  to  make  a  satisfactory'  settlement  with  his  creditors. 


THE  NEW  YORK  STOCK  EXCHANGE  97 

Then  to  secure  reinstatement  he  must  be  balloted  for  under 
the  same  conditions  as  apply  to  a  new  applicant,  except 
that  if  six  successive  ballots  are  unfavorable  to  him  he  has 
the  right  of  appeal  to  the  Governing  Committee.  The  in- 
solvent member,  however,  must  settle  with  his  creditors 
within  one  year,  or  his  seat  will  be  sold,  though  the  Govern- 
ing Committee  may  extend  the  time.  If  the  applicant  for 
membership  or  for  reinstatement  in  order  to  secure  favor- 
able action  makes  a  misstatement  upon  a  material  point, 
he  will  be  subject  to  expulsion.  If  his  failure  .has  been 
caused  by  reckless  or  unbusinesslike  trading,  he  may  be 
declared  ineligible  for  reinstatement. 

A  two-thirds  vote  is  required  to  expel  a  member  found 
guilty  of  fraud.  Prior  to  1S<>5  the  Exchange  expelled 
three  members  for  fraud — one  for  deceiving  a  customer  as 
to  the  price  of  a  stock,  another  for  forgery,  and  a  third  for 
issuing  a  worthless  check.  Since  1874-  there  have  been 
nine  expulsions — three  in  1896  for  "  bucket-shopping  "  the 
orders  of  customers  (a  term  that  will  be  explained  in  an- 
other place),  and  the  others  for  various  forms  of  fraud. 
The  most  famous  of  the  expulsions  was  that  of  Hutchison, 
John  R.  Duff's  broker  in  the  Hannibal  and  St.  Joseph 
corner.  Hutchison  appealed  to  the  courts,  which  decided 
that  the  Exchange  had  the  right  to  expel  him,  but  could 
not  appropriate  the  value  of  his  membership.  Up  to  that 
time  the  laws  of  the  Exchange  provided  that  the  seat  of  an 
expelled  member  escheated  to  the  Exchange. 

Any  member  directly  or  by  partner  connected  with  any 
organization  in  Xew  York  city  dealing  in  securities  similar 
to  those  listed  in  the  Exchange  is  liable  to  expulsion.  The 
Governing  Committee  is  very  strict  in  enforcing  this  law. 
It  has  by  resolution  prohibited  any  connection,  direct  or 
indirect,  between  its  members  with  the  Consolidated  Stock 
and  Petroleum  Exchange,  as  being  detrimental  to  the  in- 
terests of  the  Xew  York  Stock  Exchange.  Every  member 
in  Xew  York  is  required  to  have  a  place  of  business  where 


98  THE  WORK  OF  WALL  STREET 

notices  may  be  received.  No  member  can  represent  more 
than  one  firm.  Branch  offices  must  be  in  charge  either  of 
resident  partners  or  of  salaried  employees. 

The  Exchange  maintains  its  rates  of  commissions  rigidly. 
The  commissions  are  always  based  on  the  par  value  of  the 
securities  traded  in.  No  rebates  or  discounts  of  any  kind 
are  allowed.  The  constitution  provides  that  on  business 
for  parties  not  members  of  the  Exchange,  including  joint 
account  transactions  in  which  a  non-member  is  interested, 
transactions  for  parties  not  members  of  the  Exchange,  and 
for  firms  of  which  the  Exchange  member  or  members  are 
special  partners  only,  the  commission  shall  be  not  less  than 
•J  of  1  per  cent.  This,  as  has  been  stated,  amounts  to 
$12.50  on  100  shares,  but  as  every  purchase  except  for  per- 
manent investment  is  followed  by  a  sale,  the  commission 
on  one  transaction  both  ways  amounts  to  $25.  On  every 
purchase  and  sale,  therefore,  there  must  be  an  advance  of 
at  least  -^  of  1  per  cent  to  pay  the  commission.  Anything 
over  that  is  profit,  except  that  an  allowance  must  also  be 
made  for  interest. 

Business  is  done  by  members  for  members  who  do  not 
give  up  the  name  of  a  principal  at  -£%  of  1  per  cent,  and 
for  members  giving  up  a  principal  at  -^  of  1  per  cent.  A 
firm  having  one  of  its  general  partivers  as  a  member  of  the 
Exchange  is  entitled  to  these  reduced  commissions.  Vio- 
lation of  the  commission  law  is  punishable  by  suspension 
from  one  to  five  years,  but  a  second  offense  means  immedi- 
ate expulsion.  A  member  can  not  form  a  partnership  with 
a  suspended  member  or  with  any  insolvent  person. 

The  Exchange  is  opened  every  business  day  at  half  past 
nine,  but  no  business  can  be  transacted  until  ten  o'clock, 
when  the  Chairman,  who  occupies  a  seat  upon  the  rostrum, 
announces  the  opening.  It  is  the  duty  of  the  Chairman 
to  open  and  close  the  Exchange,  preserve  order,  and  make 
all  announcements,  such  as  deaths,  insolvencies,  etc.  He 
also  buvs  and  sells  stock  "  under  the  rule  " — that  is,  when  a 


THE  NEW  YORK  STOCK  EXCHANGE  99 

member  is  unable  to  make  good  deliveries,  stocks  are  bought 
or  sold  for  his  account  by  the  Chairman.  There  are  live 
hours  of  trading.  The  Exchange  closes  promptly  at  three. 
Only  loans  can  be  made  after  that  hour.  A  iine  of  $50  is 
imposed  on  a  member  who  makes  any  transaction  in  stocks 
or  bonds,  listed  or  quoted  in  the  Exchange,  after  that  hour 
or  before  10  A.  M.  in  the  Exchange  or  publicly  outside. 

As  soon  as  the  sound  of  the  Chairman's  gavel  is  heard 
at  the  opening  a  babel  of  voices  is  raised.  The  opening  is 
usually  active,  as  orders  accumulate  overnight.  To  the 
onlooker  in  the  gallery  everything  is  apparently  noise  and 
confusion.  Here  is  business,  he  would  say,  without  any 
system.  If  he  did  not  know  that  he  was  in  the  Exchange, 
he  might  suppose  that  by  accident  he  had  entered  a  lunatic 
asylum.  He  sees  men  rush  wildly  into  a  group  with  vio- 
lent gestures  and  raised  voices,  push  and  struggle  and 
shout,  all  apparently  to  no  purpose.  But  now  and  then 
he  will  observe  some  one  to  leave  the  group  and  quietly 
make  a  memorandum  on  a  pad.  In  all  that  babel  of  voices 
and  mass  of  struggling  men,  comparable  only  to  the  crush 
on  the  Brooklyn  Bridge  in  the  rush  hours,  a  sale  has  been 
made  involving  thousands  of  dollars. 

The  Stock  Exchange  has  for  years  been  one  of  the  show- 
places  of  Xew  York.  Tourists  are  always  taken  there, 
and  the  galleries  are  crowded,  especially  on  days  of  excite- 
ment, when  the  scenes  on  the  floor  are  of  extraordinary 
interest.  In  the  new  Exchange  there  will  be  a  gallery,  but 
it  will  no  longer  be  possible  to  visit  the  Exchange  whenever 
one  is  so  inclined,  as  admission  to  the  gallery  will  be  denied 
to  all  except  those  bearing  cards  of  admission  signed  by 
members.  The  authorities  of  the  Exchange  do  not  think  it 
safe,  or  otherwise  desirable,  that  there  should  be  a  crowd 
of  unidentified  strangers  in  the  gallery  in  times  of  excite- 
ment or  panic. 

But  while  superficially  all  is  confusion  worse  confounded 
in  the  Board  room,  as  a  matter  of  fact  no  system  could  be 


100  THE  WORK  OP  WALL  STREET 

more  simple  or  effective,  and  all  trading  is  done  under 
strict  rules  rigidly  enforced.  In  every  part  of  the  room 
are  posts  bearing  placards  on  which  are  printed  the  names 
of  stocks.  Every  active  security  lias  its  own  place  for 
dealings.  Thus  there  is  a  Sugar  post,  a  Reading  post,  and 
the  like.  There  is  a  place  for  borrowing  stock,  and  another 
for  loaning  money.  There  are  some  posts  where  several 
stocks  are  traded  in.  Brokers  having  orders  to  buy  Sugar 
go  to  the  Sugar  post,  and  cry  out  how  much  they  want  and 
the  price  they  will  pay,  much  as  one  would  bid  for  real 
estate  at  an  auction-room,  except  that  here  there  is  no 
auctioneer.  One  broker  bids,  say,  125  for  Sugar.  There 
is  another  broker  \vho  has  an  order  to  sell  at  125^,  or  there 
may  be  a  dozen  offers  or  a  dozen  bids  at  the  same  time. 
The  first  bid  or  offer,  however,  when  it  can  be  distinguished, 
takes  the  precedence.  If  there  are  more  offers  than  bids 
the  market  is  weak  and  the  price  declines.  If  the  demand  is 
greater  than  the  supply,  price  goes  up.  Prices  are  made 
by  eighths  of  1  per  cent ;  the  fractions  used  are  •§-,  £,  J, 
etc. ;  there  are  no  thirds  or  sevenths.  No  seller  offers  a 
stock  down  at  more  than  -J  of  a  point  at  a  time.  For  in- 
stance, if  his  offer  of  100  brings  no  buyer,  his  next  offer 
is  always  99|-.  Each  post  has  an  indicator  giving  the  last 
quotation  made.  It  is  necessary  that  the  broker  should  be 
active,  strong  of  physique  and  of  voice,  quick  to  see,  and 
prompt  to  act.  No  other  occupation  requires  more  alert- 
ness of  mind,  coupled  with  more  strength  of  body  and 
tension  of  nerve,  than  that  of  the  broker  of  the  Stock 
Exchange.  All  business  is  done  by  word  of  mouth.  There 
are  no  written  contracts.  A  mere  word  "  sold"  or  "  taken  " 
closes  a  transaction  that  may  involve  $10,000,  or  even 
$1,000,000.  As  he  buys  or  sells,  the  broker  records  on  a 
little  pad,  at  the  earliest  opportunity,  the  name  of  the 
broker  of  whom  he  has  bought  or  to  whom  he  has  sold. 

These  pads  are  supplied   to  the  members  of  the  Ex- 
change and  are  of  uniform  size.     The  following  shows  the 


THE  NEW  YORK  STOCK  EXCHANGE 


101 


size  of  one  of  these  pads,  and  it  is  of  interest  as  showing  in 
how  small  a  space  a  large  transaction  may  be  recorded ; 


Tlie  brokers'  pad. 

In  this  case  the  broker  has  bought  500  shares  of 
York  Central  at  1G2,  the  total  involved  being  $81,000.  He 
simply  recorded  the  name  of  the  seller,  the  amount,  the 
price,  and  his  own  initials.  Later,  as  will  be  explained, 
there  are  comparisons  made  between  buyers  and  sellers. 

Here,  then,  is  a  market,  or  combination  of  markets,  in 
which,  strictly  speaking,  there  is  no  actual  exchange  of 
securities.  That  comes  later.  Xo  stock  or  bond  is  ever 


102  THE  WORK  OF  WALL  STREET 

transferred  in  the  Board  room.  All  that  takes  place  there 
is  an  oral  contract  to  sell  or  buy,  to  deliver  or  receive,  a 
certain  number  of  stocks  or  bonds  at  a  certain  time  outside 
of  the  Exchange.  These  oral  contracts  to  deliver  are  gen- 
erally called  "  sales,"  but  sometimes  "  transactions." 

No  one  is  allowed  on  the  floor  except  members  and 
uniformed  employees  of  the  Exchange.  When  a  member 
is  wanted  at  the  door  or  at  the  railing  which  surrounds  the 
Board  room,  his  name  is  given  to  an  employee,  who,  by 
means  of  an  electric  annunciator,  uncovers  his  number 
painted  on  little  squares  arranged  in  regular  order  on  the 
wall  like  a  huge  checker-board.  Each  active  member  is 
allotted  a  number,  and  as  he  knows  its  place  on  the  wall,  it 
is  easy  for  him  to  keep  his  eye  on  the  square  holding  it. 
When  he  is  not  wanted  the  number  is  covered  ;  but  when 
wanted,  the  cover  is  lifted,  and  the  number  is  displayed 
until  he  responds  to  the  call.  This  ingenious  device  was 
introduced  in  1881.  It  will  be  superseded  in  the  new 
building  by  an  improved  system.  Each  member's  number 
will  be  painted  on  a  rectangle  of  opaque  glass  about  (.»  by  12 
inches  in  size.  Behind  the  glass  will  be  electric  lights  of 
different  colors.  If  a  member  is  wanted  at  the  telephone, 
a  light  of  one  color  will  be  shown,  or  if  he  is  wanted  at  the 
entrance,  a  light  of  another  color  will  flash. 

Most  of  the  orders  are  conveyed  to  the  floor  by  tele- 
phones, of  which  there  are  several  hundred  around  the 
Board  room.  These  telephones  are  leased  by  the  individual 
members,  and  connect  with  their  offices.  Millions  of  dol- 
lars' worth  of  property  are  bought  or  sold  every  day  through 
the  agency  of  these  telephones. 

Between  the  telephone,  the  annunciator,  and  the  execu- 
tion of  his  orders  in  the  various  groups,  the  active  broker, 
in  his  few  hours  on  the  Exchange,  works  harder  than  most 
people  do  in  twice  the  time.  He  is  under  a  severe  nervous 
strain,  lie  labors  in  an  atmosphere  of  excitement,  sup- 
pressed for  the  most  part,  but  at  times  belching  forth  in 


THE  NEW  YORK  STOCK  EXCHANGE  103 

volcanic  fury.  Besides  executing  his  orders,  he  is  sup- 
posed to  keep  a  watch  on  what  is  going  on  in  all  parts  of 
the  room,  and  to  report  to  his  office  all  rumors  that  are  cir- 
culated and  all  evidences  he  discovers  of  manipulation  and 
other  influences  at  work.  He  must  know  what  other  brokers 
or  traders  are  selling  or  buying,  and  whom  they  are  sup- 
posed to  represent.  He  must  form  a  quick  judgment  as  to 
the  forces  which  are  at  work  in  the  market  and  as  to  the 
probable  rise  or  fall  of  prices. 

No  wonder  the  active  Board  member  is  usually  a  young 
man.  The  elder  members  of  the  firm  remain  in  the  office 
directing  its  affairs  and  advising  customers.  The  juniors 
have  to  enter  the  arena  of  speculation  to  grapple  with  the 
gladiators  of  the  Board  room.  In  a  time  of  special  excite- 
ment this  is  no  mere  figure  of  speech,  because  the  broker 
is  obliged  to  use  physical  force  to  push  himself  into  the 
group  of  buyers  and  sellers,  and  to  hold  his  own  and  to 
make  himself  heard  against  all  comers. 

The  constitution  of  the  Exchange  provides  that  all 
offers  made  and  accepted  shall  be  binding,  and  it  is  credit- 
able to  the  members  that  the  large  transactions,  made  as 
they  are  orally,  are  honorably  fulfilled,  and  comparatively 
few  disputes  arise  as  to  the  terms  of  any  contract.  In  all 
offers  to  buy  or  sell,  the  offer  must  he  accompanied  with 
some  specific  number  of  shares,  and  when  no  amount  is 
named  it  is  considered,  under  the  constitution,  to  be  for 
100  shares  of  stock  of  the  par  value  of  $100  each,  or  for 
$10,000  of  bonds.  As  a  matter  of  fact,  the  bulk  of  the 
transactions  is  in  §10,000  blocks. 

It  is  specified  that  bids  and  offers  may  be  made  only  as 
follows :  "  Cash,"  that  is,  for  delivery  and  payment  upon 
the  day  of  sale  ;  "  regular,"  which  is  for  delivery  upon  the 
business  day  following  the  day  of  sale  ;  "  at  three  days/' 
that  is,  for  delivery  upon  the  third  day  following  the  making 
of  the  contract ;  "  buyer's  or  seller's  options  "  for  not  less 
than  four  davs  nor  more  than  sixtv  davs. 


104  THE  WORK  OF  WALL  STREET 

These  options  mean  that  the  buyer  has  the  right  to  de- 
mand the  delivery,  or  the  seller  has  the  right  to  deliver,  at 
any  time  within  the  period  of  the  option.  This  is  a  device 
which,  in  a  measure,  corresponds  to  the  system  of  options 
or  "  futures "  in  grain  and  cotton  speculations,  in  which 
the  products  are  sold  to  be  delivered  in  some  future  month. 
The  chief  difference  is  that  grain  and  cotton  options  are  for 
months,  not  days,  and  one  may  buy  grain  or  cotton  in  March 
to  be  delivered,  it  may  be,  the  following  December. 

In  the  Stock  Exchange  on  transactions  for  more  than 
three  days  written  contracts  are  exchanged  on  the  day  fol- 
lowing the  transaction,  and  carry  interest  at  the  legal  rate. 
On  such  contracts  one  day's  notice  must  be  given,  at  or  be- 
fore 2.15  P.  M.,  before  the  securities  shall  be  deliverable 
prior  to  the  maturity  of  the  contract.  Bids  and  offers  of 
cash,  regular,  at  three  days,  and  buyer's  or  seller's  options 
may  be  made  simultaneously,  as  being  essentially  different 
propositions.  In  offers  to  buy  on  seller's  option  or  to  sell 
on  buyer's  option  the  longest  option  has  precedence.  In 
offers  to  buy  on  buyer's  option  or  sell  on  seller's  option  the 
shortest  option  has  precedence.  No  other  bids  or  offers 
have  any  standing  on  the  floor.  No  sale  is  permitted  on 
which  a  deposit  shall  be  offered  as  to  limit  of  liability. 
Brokers  carry  stocks  for  their  customers  on  margins,  but 
between  themselves  all  transactions  are  on  the  basis  of  full 
payment  on  delivery. 

No  fictitious  transactions  are  permitted  on  the  floor 
under  penalty  of  suspension  for  not  more  than  one  year. 
The  common  Street  name  for  fictitious  sales  is  "  wash  sales." 
When  two  brokers  conspire  together  to  make  a  pretended 
sale  of  a  stock  in  order  to  give  it  a  fictitious  quotation,  that 
is  "  a  wash  sale."  It  is  practicable,  however,  for  an  outside 
operator,  by  using  different  brokers,  some  to  sell  and  others 
to  buy,  by  a  process  of  "  matched  orders,"  as  they  are 
called,  to  give  a  fictitious  value  to  a  stock.  This  is,  indeed, 
a  common  manipulative  device,  and  has  at  times  been  car- 


THE  NEW  YORK  STOCK  EXCHANGE  105 

ried  to  such  extremes  as  to  constitute  very  plain  cases  of 
fraud.  While  the  brokers  may  be  innocent  tools  of  such  a 
conspiracy,  it  has  been  argued  that  the  Exchange  might  by 
some  extension  of  its  rules  be  able  to  reach  the  real  con- 
spirators, and  in  some  way  to  prevent  the  evil.  The  Ex- 
change aims  at  making  every  sale  represent  a  genuine 
transaction. 

The  constitution  provides  that  no  offers  to  buy  or  sell 
privileges  to  receive  or  deliver  securities  shall  be  made  pub- 
licly at  the  Exchange  under  a  penalty  of  $25  for  each 
offense.  By  "  privileges  "  are  meant  "  puts,"  "  calls,"  and 
"spreads,"  Wall  Street  terms  for  a  system  of  bets  on  the 
future  prices  of  stocks,  and  betting  is  not  permitted  on  the 
Exchange.  Privileges,  however,  are  largely  dealt  in  out- 
side the  Board  room,  some  professional  operators  at  times 
doing  a  heavy  business  in  them. 

When  the  broker  has  bought  or  sold  in  the  Exchange, 
he  reports  the  transaction  by  telephone  to  his  office,  and 
not  later  than  an  hour  after  the  close  of  the  Exchange  the 
seller  is  obliged  to  compare,  or  endeavor  to  compare,  the 
transaction  at  the  office  of  the  buyer.  Formerly  compari- 
sons were  made  verbally,  but  in  1891  a  new  system  was 
introduced,  and  now  slips  or  tickets  are  exchanged.  No 
comparison  or  failure  to  compare,  and  no  notification  or 
acceptance  of  notification,  shall  have  the  effect  of  creating 
or  canceling  a  contract  or  changing  its  terms.  If  the 
stocks  are  to  be  cleared,  the  transaction  passes  through  a 
system  described  in  another  chapter. 

Deliveries  of  securities  must  be  made  before  2.15  P.  M. 
on  the  same  day,  if  sold  for  cash,  or  on  the  following  day, 
if  sold  regular.  The  vast  majority  of  sales  are  regular. 
If  there  is  no  delivery  before  2.15  the  contract  may  be 
closed  out  "  tinder  the  rule."  In  this  case  immediate  notice 
must  be  sent  to  the  Chairman,  who  will  read  it  from  the 
rostrum,  and  will  publicly  buy  in  the  stock  at  the  best  price 
that  can  be  obtained.  If  this  price  is  more  than  that  at 


106  THE   WORK  OF  WALL   STREET 

which  the  stock  should  have  been  delivered,  the  buyer  has 
a  claim  against  the  seller  for  the  difference.  The  same  rule 
applies  to  borrowed  and  loaned  securities.  If  no  notice  of 
failure  to  deliver  is  given,  the  contract  continues  without 
interest  until  the  next  day.  When  the  transfer-books  of 
any  company  are  closed  by  a  legal  impediment,  deliveries 
of  stocks  on  contract  are  made  by  irrevocable  power  of 
attorney,  the  papers  to  be  satisfactory  to  the  recipient  or 
passed  upon  by  the  Committee  on  Securities. 

Definite  rules  have  been  established  by  the  Exchange 
to  govern  the  form  of  assignment  and  powers  of  attor- 
ney which  must  be  acknowledged  before  a  notary  public. 
Every  stock  certificate  carries  on  its  face  the  name  of  the 
person  to  whom  it  is  issued  and  the  number  of  shares  he 
owns.  If  the  holder  sells  the  stock,  it  is  transferred  on  the 
books  of  the  company  from  the  name  of  the  former  owner 
to  that  of  the  new,  and  a  new  certificate  is  issued  to  the 
latter,  but  it  can  also  be  transferred  by  an  assignment  on 
the  back  of  the  certificate.  Ultimately  the  buyer  will  have 
the  stock  transferred  to  his  own  name,  but  in  the  meantime 
he  has  complete  evidence  of  his  ownership.  It  is  pre- 
scribed by  the  rules  of  the  Exchange  that  the  signature  to 
the  assignment  must  be  technically  correct — that  is,  it  must 
correspond  in  every  respect  with  the  name  as  written  on 
the  face  of  the  certificate.  Even  such  prefixes  and  affixes 
as  Judge,  Doctor,  Ilev.,  or  M.  D.  or  LL.  D.  must  appear  in 
the  indorsement.  Certificates  in  the  name  of  a  married 
woman  are  not  a  good  delivery  while  the  transfer-books 
are  open ;  when  the  books  are  closed  a  joint  execution  of 
the  assignment  by  both  the  husband  and  wife  before  a 
notary  public  is  required.  An  indorsement  by  a  firm  rep- 
resented in  the  Exchange  on  a  certificate  is  considered  a 
guarantee  of  the  correctness  of  the  signature  of  the  person 
in  whose  name  the  stock  stands.  In  the  delivery  of  stock 
the  receiver  has  the  option  of  receiving  by  certificate  and 
powers  of  attorney  irrevocable  in  the  name  of  and  guaran- 


THE  NEW  YORK  STOCK  EXCHANGE  107 

teed  by  a  member  of  or  firm  represented  in  the  Exchange, 
or  by  transfer  thereof ;  but  in  all  cases  where  personal  liabil- 
ity attaches  to  ownership,  the  seller  has  the  right  to  deliver 
by  actual  transfer  on  the  books  of  the  company.  The  re- 
ceiver may,  in  all  cases,  require  delivery  by  transfer  when 
there  is  time  to  make  it  and  the  books  are  open.  Certifi- 
cates in  the  name  of  an  institution  or  in  the  name  of  one 
of  its  officers  with  title  affixed  are  not  a  good  delivery  un- 
less assignment  is  acknowledged  before  a  notary.  Some 
companies — as,  for  instance,  the  Western  Union  Telegraph 
and  the  American  Sugar  Refineries — require,  in  addition,  a 
certified  copy  of  the  resolutions  of  the  directors  of  the 
company  in  whose  name  the  stock  stands. 

Deliveries  should  be  made  in  lots  of  100  shares  or  mul- 
tiples thereof,  and  in  the  case  of  bonds  in  lots  of  $10,000 
or  multiples  thereof.  Dividends  on  stocks  are  paid,  of 
course,  only  to  the  person  to  whom  certificates  have  been 
issued  and  whose  names  appear  on  the  books.  As  soon  as 
the  books  are  closed  all  transactions  in  the  stocks  are  "  ex- 
dividend."  The  buyer  does  not  receive  the  dividend,  as  his 
name  can  not  be  entered  on  the  books  after  they  have  been 
closed.  The  constitution  of  the  Exchange  provides  that 
the  buyer  is  entitled  to  receive  all  interests,  dividends, 
rights  and  privileges,  except  voting  power,  which  may  per- 
tain to  the  securities  contracted  for,  and  for  which  the 
transfer-books  shall  be  closed  during  the  pendency  of  the 
contract,  and  the  seller  is  obliged  to  deliver  to  him  a  due 
bill  therefor  signed  or  indorsed  by  him.  But  when  a  stock 
is  sold,  ex-dividend,  it  is  sold  with  the  dividend  off.  The 
ex-dividend  quotation  of  a  stock  is  generally  the  last  pre- 
vious price  less  the  amount  of  the  dividend.  For  instance, 
if  the  price  had  been  130,  and  the  books  closed  for  a  divi- 
dend of  H,  the  next  quotation  would  be  1283- .  The  con- 
stitution prohibits,  under  penalty  for  violation,  all  offers  to 
buy  or  sell  dividends  publicly  at  the  Exchange.  This,  how- 
ever, is  done  frequently  in  Wall  Street.  It  is  in  the  nature 


108  THE   WORK  OF  WALL  STREET 

of  a  bet  on  the  amount  of  the  coming  dividend.  For  in- 
stance, there  may  be  much  discussion  whether  the  Ameri- 
can Sugar  Refineries  Company's  next  quarterly  dividend 
will  be  If  per  cent  or  2  per  cent.  A  bull  on  the  stock 
believes  that  the  dividend  will  be  increased,  so  he  offers 
If  for  the  next  dividend.  If  the  company  declares  2  per 
cent,  lie  makes  the  difference  of  %  per  cent;  but  if  the 
old  rate  is  declared,  he  loses  what  he  has  paid  in  excess  of 
the  amount  declared. 

As  has  been  said,  there  is  a  place  in  the  Exchange  where 
stocks  may  be  loaned  and  borrowed.  The  outsider  is  often 
puzzled  by  this  class  of  transactions.  Why,  he  may  ask, 
does  any  one  desire  to  borrow  stocks?  He  borrows  in 
order  to  make  deliveries.  He  is  under  contract  to  deliver 
say  100  shares  of  Rock  Island.  He  does  not  own  the  stock 
and  so  he  borrows  it.  But  why  should  he  sell  something 
that  he  does  not  own?  This  question  opens  up  the  phe- 
nomena of  "short"  sales.  It  has  already  been  explained 
that  a  bear  is  short  when  he  has  sold  stock  that  he  does  not 
own  but  hopes  to  be  able  to  buy  on  a  declining  market. 
He  believes,  to  put  a  suppositional  case,  that  the  stock  of 
the  "  Trans-Continental  "  Company  is  selling  too  high.  It  is 
paying  5  per  cent  a  year,  but  is  quoted  at  172  on  reports 
that  there  will  be  an  increase  to  6  per  cent.  The  bear  has 
information,  or  thinks  he  has  information,  that  the  directors 
will  maintain  the  old  rate,  so  he  begins  to  sell  the  stock. 
But  as  he  does  not  own  a  share,  and  as  deliveries  must  be 
made  the  day  following  the  sale,  his  broker  borrows  the 
stock  for  him.  There  are  usually  many  lenders,  for  it  is 
cheaper  to  lend  the  stock  than  to  carry  it  as  collateral  for  a 
loan  at  a  bank.  The  lender  of  a  stock  receives  its  full 
market  value  in  cash.  His  advantage  is  that  he  can  thus 
receive  a  larger  sum  on  the  stock  at  a  lower  rate  of  interest 
than  he  could  by  borrowing  money  on  it  at  the  bank,  and 
at  the  same  time  he  has  the  right  to  demand  return  of  the 
stock  on  repayment  of  the  sum  given  for  it.  Loans  of 


THE  NEW  YORK  STOCK  EXCHANGE  109 

stock  thus  appear  on  their  face  the  same  as  sales,  and  are 
subject  to  the  same  rules  of  delivery  and  clearance.  The 
bear  who  is  short  thus  makes  delivery  of  the  stock  that  he 
has  sold  with  stock  that  he  has  borrowed.  Taking  up  again 
the  thread  of  the  suppositional  case,  let  it  be  understood 
that  the  bear's  information  is  correct.  The  old  rate  of 
dividend  is  declared  and  the  price  of  the  stock  declines  to 
1 65.  Then  the  operator  orders  the  broker  to  buy  the  stock 
in  for  him.  This  is  accomplished,  the  loan  is  then  satisfied 
by  the  delivery  to  the  lender  of  the  stock  bought,  and  the 
operator  has  made  $7  a  share,  less  commissions  and  in- 
terest. 

As  a  rule,  only  professional  or  semiprofessional  specu- 
lators operate  on  the  short  side.  Outsiders  almost  always 
trade  on  the  long  side.  Indeed,  the  majority  of  people  are 
by  temperament  bulls.  Wall  Street  is  distinguished  from 
most  other  markets  for  the  facilities  it  affords  for  selling 
what  one  does  not  possess.  Short  selling  has  been  subject 
to  much  criticism  in  that  its  effect  is  to  depreciate  the  mar- 
ket value  of  property.  It  is  described  as  an  assault  on 
values.  If  A  owns  200  shares  of  stocks  valued  at  $20,000, 
and  B  offers  to  sell  the  same  at  $10,000,  he  has  depreciated 
the  value  of  A's  property  by  $1,000.  It  may  be  said  that 
the  intrinsic  value  is  unchanged.  But  if  A  seeks  to  bor- 
row money  on  his  stock,  the  bank  will  assess  its  value  as 
collateral  on  the  basis  of  the  price  at  which  B  offers  to  sell, 
and  not  on  what  A  considers  it  to  be  worth.  Nevertheless, 
it  must  be  confessed  that  it  is  difficult  to  distinguish  any 
real  difference  in  the  nature  of  transactions  on  the  long  and 
the  short  side.  If  it  is  right  to  speculate  for  a  rise,  it  is 
right  to  speculate  for  a  fall.  The  bear  lias  his  place  in  the 
market.  lie  sometimes  performs  a  useful  office  in  restor- 
ing prices  to  their  proper  level.  Like  the  minority  in  Con- 
gress, which  serves  as  a  check  on  the  majority,  the  bear 
constitutes  a  check  on  undue  inflation  of  prices.  In  the 
laws  of  the  Exchange  loans  of  stock  are  treated  much  the 


110  THE   WORK  OF   WALL   STREET 

same  as  sales.     It  is  provided  that  notice  for  the  return  of 
securities  must  be  given  at  or  before  one  o'clock. 

The  Exchange  maintains  a  separate  Bond  room,  but 
places  are  also  set  apart  on  the  main  floor  for  bond  deal- 
ings, and  the  transactions  sometimes  exceed  $5,000,000  a 
day,  and  have  reached  $11,564,500.  But  the  outside  sales 
of  bonds,  "  over  the  counter,"  as  the  Street  phrase  is,  are 
larger,  and  call  for  the  services  of  a  distinct  class  of  brokers 
expert  in  investment  securities. 

The  business  of  a  stock  broker  is  profitable  but  extra- 
hazardous.  One  day  of  panic  like  that  of  May  9,  1001, 
may  wipe  out  the  profits  of  months  of  active  trade.  In- 
deed, at  one  time  on  that  day  it  is  believed  that  a  majority 
of  the  brokerage  houses  were  practically  insolvent,  and  but 
for  the  speedy  relief  and  rally  many  would  have  gone 
under.  Nevertheless,  in  the  past  thirty-two  years  there 
have  been  only  631  Stock  Exchange  failures,  an  average  of 
20  a  year.  Thus  1  in  every  55  of  the  1,100  members  fail 
every  year.  Years  of  panic  naturally  produce  the  largest 
number  of  insolvencies.  During  the  last  third  of  a  cen- 
tury, 1873  was  the  most  prolific  in  Stock  Exchange  fail- 
ures. There  were  79  in  that  year,  and  in  the  years  of  de- 
pression from  187-1  to  1877,  inclusive,  the  insolvencies 
numbered  153.  In  the  panic  of  1893  only  13  stock  firms 
failed,  and  in  the  three  succeeding  years  of  depression  only 
30  fell  by  the  way.  It  is  clear,  therefore,  that  the  improve- 
ment in  the  mechanism  of  the  Exchange,  particularly  by 
the  establishment  of  the  Stock  Clearing-IIouse,  has  greatly 
reduced  the  risks  of  the  brokerage  business.  In  boom 
times  there  are  few  failures.  From  1881  to  Iss3  there 
were  only  20.  In  the  last  four  years  there  have  been  23  ; 
in  1901  there  were  only  3. 

The  Exchange  has  a  Committee  on  Insolvencies,  con- 
sisting of  three  members  of  the  Committee  on  Admissions, 
whose  duty  it  is  to  investigate  every  case  of  insolvency 
immediately  after  its  announcement ;  and  should  it  ascertain 


THE  NEW  YORK  STOCK  EXCHANGE  111 

that  the  failure  is  caused  by  reckless  or  unbusinesslike 
dealings,  it  reports  the  same  to  the  Governing  Committee, 
and  the  member  may  be  declared  ineligible  for  reinstate- 
ment, even  if  he  should  settle  with  his  creditors.  There 
have  been  a  number  of  cases  in  which  reinstatement  has 
been  refused  for  this  reason.  A  member  in  applying  for 
reinstatement  is  obliged  to  give  a  list  of  his  creditors,  a 
statement  of  the  amounts  of  the  original  liabilities,  and 
the  nature  of  settlement  in  each  case.  When  a  member 
fails,  his  outstanding  contracts  are  fulfilled  by  buying  in  or 
selling  out  under  the  rule  of  the  Exchange. 

The  Exchange  is  closed  on  Sundays  and  all  holidays, 
and  it  often  voluntarily  closes  its  doors  on  Good  Friday 
and  on  such  special  occasions  as  the  funeral  of  the  Presi- 
dent of  the  United  States  or  the  celebration  of  a  national 
event.  Business  on  Saturdays  ends  at  noon.  All  contracts 
due  on  Sundays  and  other  holidays  are  settled  on  the  pre- 
ceding day.  On  Saturday  all  contracts  in  the  regular  way, 
and  loans  of  stocks  and  money  made  Friday,  are  settled  on 
Monday,  and  other  contracts  and  loans  of  stocks  and  money 
falling  due  on  Saturday  are  settled  the  day  previous. 

The  government  of  the  Exchange  is  vested  in  the 
Governing  Committee,  consisting  of  a  President  and  Treas- 
urer, elected  annually,  and  of  -io  members  chosen  for  terms 
of  four  years.  They  are  divided  in  classes,  so  that  10  arc 
elected  every  year.  This  committee  has  supreme  authority. 
Its  decision  on  all  matters  is  final.  Before  the  consolida- 
tion in  1809,  every  matter  of  business  was  put  to  a  vote  of 
the  members  of  the  Exchange,  but  the  present  system  has 
worked  far  better.  It  is  substantially  the  same  as  that  of 
the  directors  of  a  corporation.  The  governors  are  divided 
into  a  number  of  subcommittees  which  have  supervision 
over  the  different  parts  of  the  machinery  of  the  Exchange. 
There  are  committees  on  arrangements,  admissions,  arbitra- 
tion, commissions,  constitution,  finance,  law,  securities, 
stock  list,  unlisted  securities,  and  the  Clearing-IIouse. 


112  THE   WORK  OP   WALL  STREET 

Governors  are  paid  $5  for  every  meeting  they  attend,  but 
the  service  they  perform  is  really  one  of  love.  Men  who 
could  command  high  salaries  as  officers  of  corporations 
practically  give  their  abilities  and  a  large  share  of  their 
time  to  the  proper  administration  of  the  affairs  of  the  in- 
stitution. The  Arbitration  Committee  settles  without  resort 
to  litigation  differences  between  members,  and  also  between 
members  and  non-members  when  the  latter  will  agree  to 
abide  by  the  result. 

To  be  President  of  the  Exchange  is  considered  a  high 
distinction.  Since  1817,  40  men  have  held  the  office, 
among  the  more  noted  being  John  Ward,  II.  G.  Stebbins, 
Charles  R.  Marvin,  "W.  R.  Yermilye,  William  Alexander 
Smith,  Edward  King,  Brayton  Ives,  Donald  Mackay, 
J.  Edward  Simmons,  Francis  L.  Earnes,  and  Rudolph  Kep- 
pler.  There  have  been  only  seven  secretaries  in  eighty-five 
years.  The  Exchange  has  also  a  Chairman,  whose  duties 
have  been  explained.  This  official  receives  a  salary ;  he  is 
a  member  of  the  Exchange  but  not  of  the  Governing  Com- 
mittee. 

The  new  building  of  the  Stock  Exchange  stands  in 
Broad,  New,  and  Wall  Streets,  on  the  site  of  the  old  build- 
ing and  that  of  adjoining  property  bought  so  as  to  increase 
the  size  of  the  Board  room,  and  provide  other  facilities  for 
an  enlarged  business.  The  building,  constructed  of  a  high 
grade  of  Georgia  marble,  and  distinguished  by  rows  of  fine 
Corinthian  columns,  is  admirable  in  exterior  architecture 
and  interior  conveniences.  The  Board  room  is  a  superb 
apartment,  138  feet  long  by  112  feet  wide,  and  has  a  height 
of  80  feet.  It  extends  from  Broad  Street  to  jSTew,  and  con- 
tains many  novelties  for  lighting,  heating,  ventilation,  and 
the  transaction  of  business.  It  is  claimed  for  it  that  this 
is  the  most  complete  Stock  Exchange  in  the  world,  a  veri- 
table palace  of  speculation. 

In  the  basement  are  built  great  steel  vaults  containing 
hundreds  of  safe-deposit  boxes  or  safes  for  the  security  of 


THE  NEW  YORK  STOCK  EXCHANGE  113 

stocks  and  bonds  held  by  the  members.  It  is  one  of  the 
picturesque  sights  of  Broad  and  Wall  Streets  after  3  o'clock 
to  see  the  brokers  carrying  their  securities  to  these  vaults. 
First  will  come  two  clerks  carrying  a  box  containing  the 
valuable  papers.  Then  follows  closely  a  member  of  the 
firm  who  keeps  an  eye  on  the  box  and  deposits  it  in  his 
safe.  Millions  upon  millions  of  dollars'  worth  of  securities 
are  thus  carried  through  the  streets  of  the  financial  district 
every  business  day. 

It  is  but  natural  to  inquire  how  the  mechanism  of  the 
New  York  Stock  Exchange  compares  with  that  of  the 
London  Exchange.  There  is  really  no  comparison  ;  there 
is  a  contrast.*  The  London  Exchange  has  the  advantage  of 
the  New  York  Exchange  in  the  scope  of  its  trading,  which 
is  world-wide.  The  London  Exchange  trades  freely  in 
American  stocks,  but  English  stocks  are  not  traded  in  here, 
although  there  has  been  some  talk  recently,  without  proba- 
bility of  it  amounting  to  anything,  of  introducing  the 
shares  of  the  South  African  Mining  Companies,  and  as 
this  is  written,  Russian  bonds  have  been  placed  on  the  list ; 
so  that  the  time  can  not  be  far  distant:  when  foreign  stocks 
will  be  listed  on  the  New  York  Exchange.  American 
securities  were  once  the  leading  objects  of  speculation  in 
London,  and  as  many  as  800  London  jobbers  and  brokers 
devoted  themselves  almost  exclusively  to  them.  But  the 
Kaffir  stocks  now  take  the  precedence  there,  and  there  are 
only  about  100  traders  in  the  "  Yankee  Rails." 

In  everything  but  scope  the  New  York  Exchange  has 
the  advantage.  The  London  system  is  antiquated  and 
clumsy.  There  are  clearances,  but  they  are  made  every 

*  Prof.  James  IJryce,  in  The  American  Commonwealth,  says:  "As 
the  eagerness  and  passion  of  New  York  leave  European  stock-markets 
far  behind,  for  what  the  Paris  and  London  Exchanges  are  at  rare  mo- 
ments, Wall  Street  is  for  weeks,  or  perhaps,  with  a  few  intermissions,  for 
months  together,  so  the  operations  of  Wall  Street  are  vaster,  more  boldly 
conceived,  executed  with  a  steadier  precision  than  those  of  European 
speculators." 


THE  WORK  OF   WALL  STREET 

two  weeks,  not  daily.  Stocks  are  admitted  to  dealings,  but 
under  no  such  scrutiny  and  regulations  as  prevail  in  the 
listing  by  the  New  York  Exchange.  Then,  in  London 
there  is  a  dual  system  of  jobbers  and  brokers,  that  seems 
incomprehensible  to  Americans  accustomed  to  direct  deal- 
ings between  principals  and  agents.  As  in  the  administra- 
tion of  English  law  courts  there  are  distinct  classes  of 
counselors  and  attorneys,  so  in  the  London  Stock  Exchange 
there  are  brokers  who  represent  customers,  but  who  must 
do  all  their  trading  through  jobbers,  who  have  no  dealings 
with  the  public  but  trade  among  themselves  and  with  bro- 
kers. The  jobbers  are  the  wholesalers  and  the  brokers  the 
retailers.  In  'New  York,  a  customer  may  give  his  order  in 
a  broker's  office  and  have  it  executed  in  the  Exchange 
possibly  in  two  or  three  minutes  and  the  record  of  it  reported 
on  the  tape  a  minute  later;  but  business  in  London  goes 
through  a  system  of  circumlocution  and  delay  quite  char- 
acteristic of  English  conservatism  and  antagonism  to  haste. 
'No  record  of  sales  is  made,  and  while  there  are  stock 
"tickers"  there  was  much  opposition  to  their  introduction, 
and  even  now  they  record  only  prices,  and  not  sales. 

The  London  Exchange  in  11)01  contained  4,<>73  mem- 
bers and  3,147  clerks.  The  latter  serve  four  years  of  appren- 
ticeship, when  they  may  become  members  on  payment  of 
an  entrance  fee  of  250  guineas.  Others  than  clerks  may 
join  on  a  payment  double  that  amount.  Members  are 
reelected  every  year.  The  Exchange  is  governed  very 
differently  from  that  of  'New  York.  It  is  controlled  by  a 
stock  company  commonly  called  the  "  House,"  having 
£240,000  capital  divided  into  20,000  shares,  held  by  1,1.") 7 
members  of  the  Exchange.  Only  members  can  be  per- 
manent holders  of  the  stock,  and  no  one  can  own  more 
than  200  shares. 

Since  the  introduction  of  the  cable  there  have  been  op- 
portunities for  what  are  called  "arbitrage"  dealings  be- 
tween the  Xew  York  and  London  stock-markets.  Instan- 


THE  NEW  YORK  STOCK  EXCHANGE  115 

taneous  quotations  are  exchanged  between  Xew  York  and 
London,  but  as  there  is  generally  a  difference  in  the  prices, 
an  active  broker  may,  through  his  representative  abroad,  be 
able  to  buy  in  one  market  and  sell  in  another  at  the  same 
time  and  clear  a  profit.  In  an  arbitrage  transaction,  the 
ocean  has  to  be  crossed  twice  by  a  cablegram  passing 
through  the  hands  of  three  operators,  but  this  takes  only 
about  four  minutes,  and  has  been  done  in  less  time.  There 
are  about  ten  houses  that  do  an  arbitrage  business  with  Lon- 
don, and  six  of  these  do  nearly  all  the  trading.  The  differ- 
ence in  time  between  London  and  Xew  York  is  four  minutes 
and  one  second  less  than  five  hours.  As  the  Xew  York 
Exchange  opens  at  10  A.  M.,  it  is  then  four  minutes  of  three 
o'clock  in  the  afternoon  in  London,  and  by  two  minutes 
after  three  the  full  Xew  York  opening  prices  are  known  in 
London,  only  the  six  minutes  being  required  to  make  the 
sales  in  Xew  York,  to  gather  the  quotations,  to  put  them 
into  the  hands  of  the  telegraph  operator,  to  transmit  them 
to  London  and  to  publish  them  there. 

The  hour  of  closing  business  in  the  London  Exchange 
is  at  three  o'clock,  but  the  trading  goes  on  until  four  and  on 
the  curl)  much  later.  The  London  two  o'clock  quotations  are 
received  in  AVall  Street  shortly  after  9  A.  M.  London  can 
trade  by  cable  in  American  stocks  during  all  the  time  the 
Xew  York  Exchange  is  open,  as  when  it  closes  it  is  only 
eight  o'clock  in  London.  The  London  orders  executed  in 
Xew  York  are  often  large.  They  have  amounted  to  as 
many  as  100,000  shares  and  over  in  one  day,  and  they  are 
frequently  an  important  factor  in  the  market.  There  was 
formerly  a  large  arbitrage  business  between  Xew  York  and 
other  American  cities,  but  this  has  been  reduced  to  a  small 
figure  by  the  act,  in  189S,  of  the  Xew  York  Exchange, 
which,  believing  that  this  trading  as  carried  on  was  detri- 
mental to  its  interests  because  it  resulted  in  practically  ignor- 
ing the  commission  law,  took  measures  to  stop  it. 


CHAPTEK  IX 

NEW    TOEK    STOCK    EXCHANGE    CLEARING-HOUSE 

THE  growth  of  the  stock-market  is  limited  only  by  the 
ability  of  the  money  market  to  supply  the  necessary  banking 
accommodations.  No  active  broker,  unless  possessed  of  im- 
mense resources,  could  transact  a  large  business  without  the 
temporary  credit  extended  to  him  by  his  bank  through  over- 
certification  of  his  checks.  There  is  a  limit  to  the  ability 
and  willingness  of  the  banks  to  extend  the  benefit  of  such 
overcertification. 

That  limit  seemed  to  be  reached  in  1892,  when  the  banks, 
alarmed  by  the  large  certifications  required  by  the  brokers, 
threatened  action,  which  finally  forced  the  Stock  Exchange 
to  adopt  a  system  that  would  reduce  the  volume  of  required 
certification.  The  result  is  the  Stock  Clearing-IIouse  of 
the  New  York  Stock  Exchange.  For  many  years  there 
had  been  agitation  in  favor  of  stock  clearances.  As  early 
as  1857,  only  four  years  after  the  establishment  of  the  Bank 
Clearing-IIouse,  it  was  proposed  to  extend  the  same  system 
to  stocks.  During  the  period  of  the  exciting  speculation  in 
gold  after  the  war,  transactions  in  gold  were  cleared  with 
success  through  the  New  York  Gold  Exchange  Bank,  al- 
though the  system  did  not  commend  itself  as  one  adapted 
to  stocks.  The  first  stock  clearing  system  was  successfully 
established  in  Frankfort  in  1807,  and  was  speedily  adopted 
by  Berlin,  Hamburg,  Vienna,  and  London.  At  various 
periods  attempts  were  made  to  found  a  Stock  Clearing- 
IIouse  in  New  York,  but  they  all  ended  in  failure.  In  1883, 
116 


NEW  YORK  STOCK   EXCHANGE   CLEARING-HOUSE    117 

Controller  of  the  Currency  John  J.  Knox  called  attention 
to  the  London  Stock  Clearing-House,  and  suggested  the 
adoption  of  a  similar  system  as  the  means  of  reducing  the 
evil  of  overcertification. 

In  1892  K.  L.  Edwards,  President  of  the  Bank  of  the 
State  of  New  York,  which  did  a  heavy  business  with  bro- 
kers, wrote  to  the  president  of  the  Exchange  stating  that 
there  would  be  a  probable  curtailment  of  certification  unless 
something  was  done.  Then,  mainly  through  the  labor  of 
Francis  L.  Eames,  the  present  stock  clearing  system  was 
adopted  and  went  into  effect  on  May  17th,  the  one  hundredth 
anniversary  of  the  brokers'  agreement  of  1792,  out  of  which 
the  Stock  Exchange  grew. 

For  many  years  the  Philadelphia  Stock  Exchange  had 
had  such  a  system  in  successful  operation,  and  the  Boston 
Exchange  had  recently  adopted  it.  In  European  cities,  as 
has  been  stated,  clearances  had  long  been  in  operation. 
But  the  European  system  was  and  still  is  based  on  fort- 
nightly settlements,  and  the  New  York  Exchange,  long 
accustomed  to  daily  deliveries  of  stock,  preferred  a  system 
of  daily  clearances.  Although  late  in  adopting  this  clear- 
ance system,  the  New  York  Stock  Exchange  has  succeeded 
in  establishing  one  which,  for  the  extent  of  its  transactions 
and  its  adaptability  to  the  growing  business  of  the  country, 
has  no  equal  anywhere. 

"  If  this  Exchange,"  wrote  the  Special  Committee  of 
the  Exchange  in  1892  in  recommending  clearances,  "is  to 
take  the  proper  place  in  the  future  among  the  stock-markets 
of  the  world,  a  system  of  doing  business  will  be  required 
which  will  stand  the  strain  of  a  volume  of  business  larger 
than  any  heretofore  known.  Our  present  system  of  actual 
payment  of  entire  value  in  every  transaction  blocks  up  in 
active  times  both  banks  and  offices  to  an  intolerable  extent, 
and  is  an  obstacle  to  the  growth  of  the  business  commen- 
surate with  the  growth  of  the  country.  For  causes  well 
understood,  the  banking  facilities  for  this  business  have  not 


118  THE   WORK  OF  WALL  STREET 

increased  during  recent  years.  A  proper  system  of  clearing 
by  largely  reducing  the  volume  of  checks  and  deliveries 
would  relieve  both  offices  and  banks  of  much  of  the  confu- 
sion and  risk  with  which  we  are  so  familiar." 

Speaking  of  the  legality  of  clearances,  the  report  said  : 
"  The  laws  of  this  State  require  in  all  contracts  an  intent  to 
deliver.  At  the  present  day,  on  the  various  exchanges,  trans- 
actions in  securities  and  agricultural  products  have  reached 
such  magnitude,  that  to  pass  the  actual  property  or  ware- 
house receipt  or  the  certificate  of  stock  into  the  hands  of 
each  party  to  every  contract  is  impossible.  The  business  of 
the  world  is  now  too  large  to  be  transacted  in  that  way. 
Contracts  on  which  the  actual  delivery  of  the  property  can 
be  enforced  if  desired  make  the  markets  of  the  world." 
The  report  states  that  the  courts  have  held  that  such  con- 
tracts show  the  required  intent  to  deliver  and  are  thus  legal. 

The  Stock  Exchange  Clearing-IIouse  has  fulfilled  every 
prediction  made  in  this  report.  Writing  in  189-1,  two  years 
after  its  establishment,  Mr.  Eames  said  that  "  during  the 
panic  of  1893  failures  on  the  Stock  Exchange  would  have 
been  vastly  more  numerous  had  there  been  no  clearing  sys- 
tem in  operation."  So  in  the  unequaled  speculation  of 
19o],  the  clearing  system  proved  more  than  adequate  to 
every  demand  upon  it.  As  a  matter  of  fact,  it  has  expanded 
to  an  almost  unlimited  degree  the  capacity  of  the  stock- 
market.  With  its  aid  the  mechanism  of  Wall  Street  ap- 
pears powerful  enough  to  conduct  easily  and  well  all  the 
possible  operations  of  the  future.  The  importance  of  the 
Clearing-IIouse  can  therefore  be  scarcely  overestimated. 

It  is  conceded  that  it  would  have  been  impossible  to 
have  transacted  the  stock  business  of  19(>1  ex-Clearing- 
Ilouse.  The  machinery  of  the  Street  would  have  broken 
down.  Even  on  the  panic  day  of  May  9,  1901,  when  the 
total  sales  of  stocks  were  3,33<!,095  shares,  and  when  the 
Street  was  convulsed  by  the  tremendous  fall  in  prices,  there 
was  no  failure  of  the  Clearinfr-IIouse  svstem.  Transactions 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE    119 

of  the  9th  were  cleared  as  usual  on  the  10th,  with  the  fol- 
lowing result : 

Shares  cleared  both  sides,  including  balances 12,131,600 

Total  value  both  sides,  contracts  and  balances $961,300,000 

Share  balances  one  side 1,714,800 

Value  share  balances  one  side $129.800,000 

Cash  balances,  one  side $5,461,700 

Number  of  parties  clearing 452 

Banks  certification  obviated $221,050,000 

On  the  same  day  the  transactions  of  the  Bank  Clear- 
ing-IIouse  (the  heaviest  on  record)  were  $622,410,525,  or 
nearly  $339,000,000  less. 

The  Stock  Clearing-House,  however,  has  done  a  larger 
business  even  than  that  of  May  10th.  Inasmuch  as  there 
are  no  clearances  dated  on  Saturday,  the  clearances  of  May 
6th,  1901,  represented  two  days'  transaction.  On  that  day 
the  shares  cleared  both  sides  amounted  to  13,313,800,  hav- 
ing a  value  of  $1,132,200,000.  Over  one  billion  dollars  in 
one  day !  The  bank  certifications  obviated  amounted  to 
$286,100,000. 

The  statistics  for  the  two  years  1893  and  1901  are  of 
interest  as  summing  up  the  operation  of  the  system  in 
periods  of  panic  and  boom. 


1893. 

1901. 

Shares  cleared  both  sides,  including 
balances  

256,335,400 

926.347.300 

Total  value  both  sides,  contracts  and 
balances  

$16,169,800.000 

$77.853.500.000 

Share  balances  one  side  

24,742,700 

1:54.301.000 

Value  share  balances  one  side  

$1,470.700.000 

$10,930,853.000 

Cash  balances  one  side  

$33.110.400 

£116.849,300 

Certification  required  

$1.470.700.000 

$10.030.853.600 

Certification  obviated  

$5,143.300,000 

$17.065,042,800 

Certification   that  would   have  been 
required  without  clearances 

$6.614.200.000 

*27,995.806,400 

These  sums  are  so  great  as  to  be  beyond  human  compre- 
hension.    The  highest  monthly  total  of  stock  clearances  in 


120  THE  WORK  OF  WALL   STREET 

London  was,  in  July,  1901,  £875,728,000.  The  average 
daily  saving  to  the  banks  in  New  York  in  certifications 
amounts  to  more  than  $50,000,000. 

The  Stock  Clearing-IIouse  is  capable,  of  indefinite  ex- 
pansion ;  there  seems  to  be  no  limit  to  the  amount  of  busi- 
ness it  could  do.  It  has  handled  about  100,000  items  in 
one  day.  One  broker  alone  has  turned  in  about  1,300 
items.  If  the  other  490  firms  did  the  same  there  would  be 
637,000  items  in  one  day.  It  follows,  therefore,  that  the 
Clearing-House  can  handle  at  least  six  times  its  business  in 
1901,  and  that  is  an  underestimate. 

Through  its  operation  65  per  cent  of  all  the  shares  dealt 
in  are  eliminated  in  deliveries,  and  more  than  90  per  cent 
of  the  number  of  checks  is  done  away  with.  At  the  time 
this  was  written  64  stocks  were  regularly  cleared,  these 
representing  85  per  cent  of  the  total  sales  of  the  Exchange. 
All  sales  in  these  stocks  are  cleared,  except  at  the  time  they 
are  made  it  is  expressly  stipulated  that  they  shall  be  ex- 
Clearing-IIouse. 

The  operation  of  clearing  is  simplicity  itself.  A  sells 
100  shares  of  Atchison  to  B,  who  likewise  sells  100  shares 
of  the  same  stock  to  C.  Now,  instead  of  A  delivering  the 
stock  to  B,  and  then  B  delivering  it  to  C,  which  was  the 
method  of  business  before  the  Clearing-IIouse  was  estab- 
lished, A,  under  the  new  system,  delivers  the  stock  directly 
toC. 

This  operation  is  precisely  the  same  as  that  which  forms 
the  basis  of  foreign  exchange.  But  in  stock  clearances  the 
balances  are  settled  in  both  stocks  and  money.  This  dual- 
ity of  settlement  is  what  makes  the  stock  clearing  system 
so  puzzling  to  those  not  instructed  in  its  methods.  In 
reality  the  system  is  not  at  all  complicated.  The  reason 
for  the  double  settlement  may  be  easily  reasoned  out.  In 
the  example  given,  A  must  deliver  to  C  stock  he  has  sold 
to  B,  but  the  price  at  which  he  has  sold  to  B  may  be  dif- 
ferent from  that  at  which  C  bought  of  B.  Consequently 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE    121 

there  must  be  a  settlement  price  established,  so  that  clear- 
ances may  be  made  equitably.  It  follows  that  there  must 
also  be  a  cash  settlement  to  make  up  the  difference  between 
the  contract  or  purchase  price  and  the  settlement  price. 
This  may  be  made  clearer  by  two  simple  illustrations. 

A  sells  100  shares  of  Atchison  at  75  to  B,  who  sells 
the  same  amount  to  C  at  76.  The  clearance  then  proceeds 
as  follows :  A  is  directed  to  deliver  the  stock  to  C,  who 
pays  him  76  for  it.  But  as  A  sold  to  B  at  75,  he  gets  $1 
a  share,  or  $100  for  the  100  shares,  more  than  is  due  him. 
So  A  draws  his  check  for  $100  to  the  order  of  the  Clear- 
ing-IIouse  and  delivers  it  with  his  clearance  sheet.  C  having 
got  his  stock  at  the  price  he  contracted  to  pay  for  it,  is 
satisfied.  B  having  bought  at  75  and  sold  at  76,  has  no 
delivery  of  stock  to  make,  but  he  has  a  profit  of  $100  com- 
ing to  him,  so  he  draws  a  draft  on  the  Clearing-IIouse  for 
that  amount.  What  is  the  result  ?  A  gets  76  for  the  stock 
he  has  sold  minus  $100  paid  to  the  Clearing-IIouse.  C 
gets  the  stock  at  the  price  he  has  contracted  for,  and  B, 
who  both  bought  and  sold,  gets  his  profit  of  $100.  The 
Clearing-Iiouse  having  received  $100  from  A,  has  paid  the 
same  amount  to  B. 

In  Clearing-IIouse  transactions  the  firm  that  buys  and 
sells  the  same  stock  clears  the  transaction  on  its  own  sheet, 
drawing  on  the  Clearing-IIouse  for  the  amount  of  the  profit, 
or  paying  to  the  Clearing-IIouse  the  amount  of  the  loss,  as 
the  case  may  be.  But  wThen  the  firm  delivers  its  stock  it 
delivers  at  a  fixed  delivery  price,  and  must  credit  or  debit 
itself  for  the  difference  between  the  delivery  and  the  con- 
tract price.  In  other  words,  the  delivery  price  applies  only 
to  stock  balances  that  must  be  delivered. 

To  make  the  operation  clearer  another  illustration  must 
be  given.  A  sells  to  B  200  shares  of  Atchison  at  75.  B 
sells  200  shares  of  Atchison  to  C  at  76,  and  200  shares  of 
Union  Pacific  at  lnO.  C  sells  A  100  shares  of  Union 
Pacific  at  101.  The  delivery  or  settlement  price  of  Atchi- 


122  THE  WORK  OF  WALL  STREET 

son  is  77,  and  of  Union  Pacific  99.  The  clearance  will  then 
proceed  as  follows :  A  delivers  200  Atchison  to  C ;  B 
delivers  100  Union  Pacific  to  A  and  100  to  C.  C  has  no 
delivery,  but  receives  100  Union  Pacific  from  B  and  200 
Atchison  from  A.  As  A,  under  the  delivery  price  of  77, 
receives  $400  more  for  the  200  Atchison  than  the  selling 
price  of  75,  and  will  pay  99,  or  $200,  less  for  100  Union 
Pacific  than  the  contract  price  of  101,  he  is  a  debtor  of  the 
Clearing-IIouse  for  $600.  B  clears  200  Atchison  at  $200 
profit,  the  difference  between  the  contract  purchase  price 
of  75  and  the  contract  selling  price  of  76.  But  in  deliver- 
ing 200  Union  Pacific  to  A  and  C  at  the  delivery  price  of 
99,  he  gets  $200  less  than  under  the  contract  selling  price 
of  100.  So  B  is  a  creditor  of  the  Clearing-IIouse  for 
$4oO.  C  clears  100  shares  of  Union  Pacific  at  a  profit  of 
$100,  the  difference  between  the  contract  purchase  price  of 
100  and  the  contract  selling  price  of  101,  but  he  pays  $100 
less  for  the  100  Union  Pacific  he  will  receive  from  B  under  the 
delivery  price  of  99  than  he  contracted  to  pay,  so  these  two 
items  balance  each  other.  C  pays,  under  the  delivery  price 
of  77,  $200  more  for  his  /Vtchison  than  the  contract  price 
of  76,  and  has  therefore  a  credit  of  $2oO  at  the  Clearing- 
Ilouse.  The  Clearing-IIouse  would  receive  $600  from  A, 
and  pay  $400  to  B  and  $200  to  C,  and  the  deliveries  of 
balances  of  stocks  would  then  proceed  as  already  indicated. 
This  illustration  shows  the  process  of  clearance  and  the 
difference  between  contract  and  delivery  prices,  but  inade- 
quately indicates  the  advantages  of  the  Clearing-IIouse  in 
reducing  deliveries  and  obviating  certifications.  The  opera- 
tion of  clearance  looks  simple  when  reduced  to  this  alpha- 
betical form,  but  when  the  operations  of  nearly  5oo  firms, 
each  making  many  purchases  and  sales  every  day,  are  to  be 
cleared,  the  system,  while  precisely  the  same,  is  working  on 
so  large  a  scale  and  in  so  many  different  stocks  that  it  is 
not  surprising  that  the  outsider,  in  trying  to  understand  it, 
gets  lost  in  the  maze  of  stock  deliveries  and  cash  settle- 


NEW  YORK  STOCK  EXCHANGE   CLEARING-HOUSE    123 

ments.  In  the  practical  working  of  the  system,  however, 
there  is  nothing  involved  or  uncertain  ;  never  once  has  the 
machinery  broken  down  or  become  clogged.  In  panic  and 
in  boom  it  has  worked  with  precision,  accuracy,  and  secrecy. 

Tor  the  sr.ke  of  an  illustration  it  is  necessary  to  go 
through  the  forms  of  an  actual  clearance.*  The  firm  of 
Wilson,  Morgan  &  Company,  of  45  Wall  Street,  has 
through  its  Board  member,  Mr.  Morgan,  bought  or  bor- 
rowed 1,500  shares  of  Steel,  preferred,  at  varying  prices  from 
eight  different  firms,  700  shares  of  Atchison  from  one  firm 
and  TOO  of  Union  Pacific,  preferred,  from  another.  On 
the  same  day  it  has  sold  or  loaned  TOO  shares  of  Atchison 
to  one  firm,  1,000  shares  of  Union  Pacific,  preferred,  to 
five  firms,  and  1,300  shares  of  Steel,  preferred,  to  one  firm. 
This  was  not  a  very  large  day's  business,  but  it  is  better  for 
the  purposes  of  illustration  than  much  greater  operations 
would  have  been.  Yet,  even  on  this  day,  Wilson,  Morgan 
&  Company  had  had  dealings  with  seventeen  different 
firms,  bought  2,900  shares  of  stock  and  sold  3,000.  Under 
the  old  no-clearance  system  it  would  have  had  to  make 
seventeen  different  settlements  on  this  day,  involving  the 
sum  of  $519,411.14.  But  by  means  of  the  Clearing-House 
it  is  enabled  to  settle  the  whole  business  by  drawing  a  draft 
for  $401.14  and  delivering  300  shares  of  Union  Pacific,  pre- 
ferred, for  which  it  receives  a  check  for  $26,400  and  by 
accepting  200  shares  of  Steel,  preferred,  for  which  it  gives  a 
check  for  $18,800.  The  clearance  is  therefore  reduced  from 
seventeen  deliveries  to  two,  and  from  seventeen  checks 
amounting  to  $519,411.14  to  three  checks  amounting  to 
$45,661.14. 

This  is  by  no  means  an  uncommon  case.     Many  mi<rht 

t/  «/ 

have  been  given  in  which  the  process  of  elimination  was 
greater.  There  has  been  one  instance  in  which  204,000 
shares,  valued  at  $12,500,000  on  one  side,  have  been  settled 
by  a  payment  of  about  $10,000. 

*  The  names  used  are  fictitious. 


124 


THE  WORK  OF  WALL  STEEET 


Mr.  Morgan  having  made  his  purchases  and  sales  in  the 
Board  room,  reports  them  by  telephone  to  his  firm.  In  ex- 
Clearing-IIouse  transactions  comparison  slips  would  now 


OS 


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have  to  be  made  out,  but  in  Clearing-House  transactions 
clearance  or  exchange  tickets  take  their  place.  The  seller 
is  obliged  to  send  to  the  office  of  the  buyer  a  ticket  printed 


EXD                                         CLEARING-HOUSE  OF  TH 
CKD                 * 

NEW  YORK,  .^^^/?^..^<y>'^'"  OFFICE  ADDRESS, 

RECEIVE  FROM               II 

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NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE    125 

in  red  on  white  paper  to  distinguish  it  from  the  buyer's 
ticket,  which  is  printed  in  black  on  yellow  paper.  This 
record  is  in  the  form  of  an  order  on  the  Clearing-House  for 
the  delivery  or  the  receipt  of  the  stock.  For  instance,  Wil- 
son, Morgan  &  Company  having  bought  100  Steel,  pre- 
ferred, at  94f ,  from  "Watson,  Hubert  &  Company,  receives 
from  that  firm  a  white  paper  ticket  printed  in  red  as  shown 
on  page  124. 

Wilson,  Morgan  &  Company  compare  this  ticket  with 
their  own  record  of  the  transaction,  and  if  the  two  agree  the 
firm  gives  in  exchange  a  yellow  ticket  that  it  will  receive 
100  shares  of  Steel,  preferred.  The  firm  having  sold  100 
Union  Pacific,  preferred,  at  88^,  to  Roberts,  Blair  &  Com- 
pany, sends  to  its  office  a  white-red  ticket  like  that  it  has  re- 
ceived from  Watson,  Hubert  &  Company.  Roberts,  Blair 
&  Company  compare  the  ticket  with  their  record,  and,  if 
found  correct,  give  a  yellow-black  ticket — shown  on  page 
124 — in  exchange. 

Having  made  these  comparisons  and  exchanges  of  tick- 
ets with  all  the  firms  with  which  it  has  had  dealings, 
Wilson,  Morgan  &  Company  now  make  up  their  clearance 
sheet  for  the  day's  transaction  with  the  result  shown  in  the 
accompanying  folder. 

As  the  firm  has  bought  or  borrowed  and  sold  or  loaned 
TOO  shares  of  Atchison,  all  that  it  is  necessary  to  do  is  to 
ascertain  the  difference  between  the  buying  contract  price 
and  the  selling  contract  price.  As  it  bought  1,500  shares 
and  sold  1,300  shares  of  steel,  preferred,  it  can  clear  on  its 
own  sheet  1,300  shares  in  like  manner  by  ascertaining  the 
difference  in  contract  prices,  leaving  a  balance  of  200  shares 
to  be  received.  As  it  bought  TOO  Union  Pacific,  preferred, 
and  sold  1,000  shares,  it  can  clear  TOO  shares  by  finding  the 
difference  between  the  contract  prices,  leaving  300  shares  to 
be  delivered.  As  these  deliveries  are  to  be  made  at  the 
fixed  delivery  prices,  the  firm  must  ascertain  the  difference 
between  the  contract  and  delivery  prices  to  ascertain  what 


126 


THE  WORK  OF  WALL   STREET 


is  its  credit  or  debit. 
The  firm  bought  the 
1,500  shares  of  Steel, 
preferred,  for  $141,- 
575,  and  sold  1,300 
shares  for  $122,200, 
leaving  $19,375  as  the 
cost  of  the  remaining 
2:>0  shares.  But  as 
the  delivery  price  is 
94,  it  will  actually  pay 
only  $18,800  for  the 
stock  on  delivery.  So 
that  it  is  debit  for 
$575  to  the  Clearing- 
llouse,  which  will  pay 
the  sum  to  the  firm 
or  firms  to  which  it 
rightly  belongs.  The 
profit  on  the  7<>0 
shares  of  Atchison  is 
$710.34,  which  is 
therefore  due  the  firm 
from  the  Clearing- 
llou.se.  There  now 
remains  the  Union 
Pacific,  preferred,  7<>0 
of  which  were  bought 
for  $01,600  and  1,000 
sold  for  $88,325.80. 
It  is  due  to  receive, 
therefore,  $26,725.80 
for  the  300  shares 
more  that  have  been 
sold  than  bought,  but 
under  the  delivery 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE    127 


price  it  will  receive  only  $26,400,  so  that  a  balance  of 
$325.80  is  due  it  from  the  Clearing-House.  It  appears, 
therefore,  that  the  firm  is  debtor  $575  to  the  Clearing- 
House  and  creditor  $710.34  and  $325.80,  or  a  total  of 
$1,036.14,  leaving  a  credit  balance  of  $461.14. 

It  is  all  a  matter  of  simple  bookkeeping.  The  firm  now 
draws  a  draft  for  its  credit  balance  on  the  Manhattan  Bank, 
in  which  the  Clearing-House  keeps  its  account.  The  form 
of  this  draft  is  shown  on  page  126. 

This  draft,  together  with  the  clearance  sheet  and  all  the 
exchange  tickets  it  has  received  from  the  firms  representing 
the  other  side  to  the  transactions,  Wilson,  Morgan  &  Com- 

CLEARING-HOUSE  OF  THE  NEW  YORK  STOCK  EXCHANGE. 

THE  UNDERSIGNED  WILLDELIYERFOLLOWINO.  BALANCE  OF  STOCK 

AT  THE  DELIVERY  PRICE 


SHARES 


STOCK 


DELIVER  TO 


L 


Statement  of  stock  to  deliver. 


pany  deliver  at  the  Clearing-House  within  four  hours  after 
the  close  of  the  Exchange,  on  the  day  that  the  transactions 
are  made,  except  Friday.  Friday's  and  Saturday's  sheets 
are  turned  in  on  Saturday  and  the  clearance  is  made  Mon- 
day. The  other  firms  will  send  to  the  Clearing-Honse  the 
tickets  Wilson,  Morgan  &  Company  have  given  out,  so  that 

both  sides  have  complete   vouchers   for  the   sale   and  the 
10 


128  THE  WORK  OF  WALL  STREET 

Clearing- House  lias  full  authority  to  clear.  If  "Wilson, 
Morgan  &  Company's  sheet,  instead  of  showing  a  credit  in 
their  favor,  had  shown  a  debit,  it  would  have  sent,  instead  of 
a  draft,  a  check  for  the  amount  of  the  debit  on  the  firm's 
own  bank. 

At  the  same  time  it  delivers  the  sheet  at  the  Clearing- 
House  it  must  hand  in  statements  of  the  amount  of  stock 
it  has  to  deliver  or  to  receive  on  balance,  in  the  form 
shown  on  page  127. 

The  Clearing-House,  having  in  the  meantime  examined 
and  audited  all  the  items  and  made  up  its  allotment  sheets, 
will  the  next  day  at  9.30  A.  M.  return  this  statement  to 
Wilson,  Morgan  &  Company,  with  the  name  of  the  firm  to 
which  it  must  deliver  the  Union  Pacific,  preferred,  or  from 
whom  it  must  receive  the  Steel,  preferred,  as  the  case  may 
be.  About  noon  of  the  same  day  it  will  receive  back  the 
draft,  with  the  signature  of  the  manager  written  in  the 
margin  under  the  word  "  Approved."  This  draft  it  will 
deposit  in  its  bank  and  collect  through  the  Bank  Clearing- 
House.  This  closes  the  firm's  dealings  with  the  Clearing- 
House  for  the  day,  but  it  must  now  deliver  the  300  Union 
Pacific,  preferred,  to  the  firm  indicated  by  the  Clearing- 
House,  and  for  this  it  will  receive  $20,400  and  must  accept 
200  shares  of  Steel,  preferred,  for  which  it  must  pay  $18,800. 
When  the  accounts  are  balanced  the  result  will  be  exactly 
the  same  as  if  it  had  had  separate  settlements  with  each  of 
the  other  seventeen  firms  with  which  it  had  dealings  the 
day  before.  The  difference  is  that  it  has  saved  time,  trouble, 
and,  above  all,  the  extra  bank  certification  of  checks  involved 
in  ex-Clearing-IIouse  transactions.  Failure  to  deliver  or 
receive  stock  after  passing  through  the  Clearing-House  is 
dealt  with  under  the  rules  of  the  Exchange  governing  fail- 
ures to  fulfil  contract. 

It  may  be  remarked  that  the  Clearing-House  in  cases 
of  insolvency  has  saved  much  of  the  time  and  loss  in- 
volved in  making  settlements.  For  the  service  performed 


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130  THE  WORK  OF  WALL  STREET 

by  the  Clearing-House  each  firm  pays  2|-  cents  per  100 
shares  of  $100  par  value.  Only  100-share  lots  and  multiples 
thereof  are  cleared.  'No  bonds  are  cleared  except  on  special 
occasions.  Fines  are  imposed  for  mistakes  and  delays  in 
delivering  sheets,  etc.  Tickets  that  are  exchanged  and  sent 
to  the  Clearing- House  must  agree,  or  both  parties  are  fined. 

The  delivery  prices  are  established  by  the  Clearing- 
House  every  afternoon.  These  are  as  near  as  possible  to 
the  closing  prices  of  the  day,  avoiding  all  fractions,  and  as 
soon  as  established  are  sent  over  the  tickers. 

The  whole  system  of  stock  clearances  on  the  outside  of 
the  Clearing-House  has  now  been  explained.  The  system 
within  the  Clearing-House  is  fully  as  simple,  accurate,  and 
clear.  As  the  hours  are  long,  the  work  going  on  by  night 
as  well  as  day,  two  managers  are  employed  and  an  ample 
force  of  clerks.  Everything  is  systematized  as  completely 
as  in  a  bank.  Each  clerk  has  his  appointed  place  and  duty. 
The  clerks  at  the  windows  who  receive  the  clearance  sheets 
and  tickets  examine  the  items  and  total  to  see  that  they  are 
properly  made  out,  and  then  they  are  passed  to  other  clerks, 
who  audit  them  carefully.  The  exchanged  tickets  are 
distributed  in  tiers  of  boxes  like  mail  in  a  post-office,  and 
these  tickets  are  taken  to  clerks  who  compare  them  with 
the  clearance  sheet.  The  tickets  for  delivery  of  stock 
balances  are  also  sorted  and  taken  to  the  clerk  who  makes 
out  the  allotment  sheets.  Each  stock  has  its  own  sheet,  on 
the  debit  side  of  which  are  put  the  names  of  those  due  to 
receive  stock,  and  on  the  credit  side  those  who  will  deliver. 
It  is  now  comparatively  easy  to  make  the  allotments,  as  the 
specimen  sheet  on  page  129  will  show. 

J.  Dowson  &  Company  deliver  200  to  C.  Jones  &  Com- 
pany ;  Helm  Hayes  &  Company,  400  to  V.  "W.  James  & 
Company  and  100  to  J.  C.  Warwick  &  Company;  Rollins 
Brothers,  100  to  J.  P.  Smith  &  Company  ;  II.  L.  Henry  & 
Company,  100  to  Lawson  &  Brown  ;  C.  II.  Ivrouse  &  Com- 
pany, 300  to  Cullen  &  Mullen ;  Lamb  Brothers  &  Company, 


NEW  YORK  STOCK  EXCHANGE   CLEARING-HOUSE    131 

300  to  the  same  firm  ;  and  J.  C.  Lee,  300  to  Crosby,  Jack- 
son &  Company.  Of  course  there  are  always  as  many 
stocks  bought  as  there  are  sold,  so  that  both  sides  of  the 
sheet  will  exactly  balance. 

The  establishment  of  the  stock  clearance  system  was 
long  opposed  because  of  fear  that  the  clearance  sheets  would 
give  too  much  information  about  important  operations  to 
the  clerks  in  the  Clearing-House.  Experience  has  demon- 
strated that  operations  are  as  readily  concealed  under  the 
new  as  the  old  system.  Loans  of  stock,  for  instance,  appear 
on  the  clearance  sheets  as  sales,  and  any  clerk  seeing  the 
sheet  could  not  tell  whether  the  transactions  were  loans  or 
sales,  and  therefore  the  sheet  would  have  no  meaning  to 
him.  Likewise  stocks  that  appear  as  having  been  bought 
may  have  really  been  borrowed  in  operations  on  the  short 
side.  Large  operators  nearly  always  employ  two  or  more 
brokers,  and  conceal  their  operations  by  arranging  their 
orders  so  as  to  prevent  any  one  from  knowing  what  they 
are  really  doing.  Even  a  broker  may  not  be  able  to  tell 
whether  his  customer  is  really  a  bull  or  a  bear,  for  while 
the  operator  may  be  buying  through  this  broker  he  is  selling 
through  another.  How  much  less,  therefore,  can  the  clerk 
in  the  Clearing-House  comprehend  what  he  may  see  of  the 
transactions  of  the  brokers.  Besides,  the  work  of  the 
Clearing-House  is  distributed  among  many  persons.  One 
clerk  sees  only  one  small  part  of  what  is  going  on,  just  as  a 
common  soldier  sees  only  the  small  section  of  the  battle- 
field in  which  he  is  fighting,  and  is  probably  in  entire  igno- 
rance of  how  the  battle  as  a  whole  is  progressing.  The  work 
must  be  done  too  quickly  for  close  inspection,  and,  moreover, 
it  is  facilitated  by  the  use  of  numbers.  Each  member  and 
firm  has  a  number,  which  he  must  stamp  on  everything  he 
sends  to  the  Clearing-IIouse,  and  allotments  are  made  and 
clearances  consummated  very  largely  by  the  use  of  these 
numbers.  Persons  are  of  no  account  in  the  Clearing-IIouse. 
It  looks  merely  at  numbers,  balances,  and  exchanges. 


132  THE  WORK  OF  WALL  STREET 

The  Clearing-House  guards  its  secrets  strictly,  and  there 
has  never  been  an  instance  of  any  disclosure  of  information 
that  should  be  kept  private.  Clearance  sheets  and  tickets 
are  returned  to  the  different  firms  after  the  clearance  has 
been  consummated.  The  Clearing-House  keeps  no  records. 
Necessarily  in  making  clearances  it  audits  the  great  bulk  of 
the  transactions  of  the  Exchange,  no  small  service  in  itself. 

This  remarkable  institution  is  governed  by  a  committee 
of  five,  composed  of  and  appointed  by  the  Governors  of 
the  Exchange.  This  consists  at  present  (1902)  of  R.  P. 
Doremus,  Chairman,  Charles  Hazzard,  W.  H.  Granbery, 
William  Robinson,  and  F.  L.  Rodewald. 


CHAPTER  X 

TOOLS    OF   WALL    STREET 

"  OUR  current  political  economy,"  wrote  Walter  Bagehot 
thirty  years  ago,  "  does  not  sufficiently  take  account  of  time 
as  an  element  in  trade  operations."  It  can  not  be  said,  how- 
ever, that  Wall  Street  does  not  take  account  of  time.  Speed 
with  accuracy,  promptness  in  all  things — this  is  the  corner- 
stone of  modern  finance.  Most  of  the  tools  of  Wall  Street 
are  time-savers.  The  six  most  important  are  : 

The  stock  indicator. 

The  telegraph. 

The  cable. 

The  telephone. 

The  news  slips. 

The  market  reports. 

There  was  active  speculation  before  the  introduction,  in 
18G7,  of  the  stock  indicator,  or  "  ticker"  as  it  is  called,  but 
it  is  difficult  to  conceive  now  of  a  market  deprived  of  its 
use  and  compelled  to  rely  upon  quotations  carried  by  bro- 
kers from  office  to  office.  The  very  life  of  the  Street  seems 
to  depend  upon  accurate,  immediate,  and  continuous  quota- 
tions from  the  Stock  Exchange. 

These  are  provided  by  the  stock  indicator,  a  marvelous 
little  instrument  which  prints  upon  a  narrow  ribbon  of 
paper  the  sales  and  prices  made  in  the  Board  room.  The 
paper,  which  is  in  a  roll  or  spool,  feeds  itself  into  the  ticker, 
and  after  receiving  there  the  printed  impressions  falls  into 
a  basket  placed  beside  the  machine.  In  the  vernacular  of 
the  Street  this  paper  is  called  the  "  tape." 

133 


134  THE   WORK   OF   WALL  STREET 

The  Exchange  lias  always  zealously  guarded  its  quota- 
tions, and  has  endeavored  to  prevent  them  from  reaching 
rival  institutions  or  the  bucket-shops.  But  it  supplies  the 
quotations  to  its  members  and  the  outside  public  simultane- 
ously. Its  own  corps  of  reporters  obtain  the  sales  as  they 
are  made  in  the  Board  room  and  carry  them  to  four  tele- 
graph stations  placed  in  convenient  parts  of  the  room. 
These  send  the  quotations  instantly  to  a  gallery  where  the 
employees  of  the  two  ticker  companies  are  stationed.  One 
of  these,  the  New  York  Quotation  Company,  is  owned  and 
controlled  by  the  Exchange,  and  it  supplies  the  quotations 
to  its  members.  Its  tickers,  about  1,000  in  number,  do  not 
extend  outside  of  the  AVall  Street  district.  The  other  com- 
pany, the  Gold  and  Stock,  is  independent  of  the  Exchange, 
but  gets  the  quotations  simultaneously  with  the  other,  and 
has  the  right  to  sell  them,  under  certain  restrictions  here- 
after noted,  to  any  one  desiring  them.  As  a  matter  of  fact, 
tickers  are  to  be  found  in  almost  every  public  place.  They 
are  indispensable  adjuncts  of  every  banking  and  brokerage 
office. 

A  number  of  years  ago  the  Stock  Exchange  had  a  long 
controversy  with  the  then  existing  ticker  company.  It  was 
charged  that  the  latter  supplied  indicators  to  bucket-shops, 
and  the  Exchange  was  bound  to  break  up  this  abuse  of  its 
quotations.  The  controversy  was  carried  into  the  courts^ 
and  the  question  was  raised  as  to  the  right  of  the  Exchange 
to  withhold  its  quotations  from  the  public.  In  the  end  the 
Exchange  made  a  satisfactory  contract  with  the  company, 
supplying  the  public  with  quotations,  and  established  its 
special  service  for  its  own  members. 

While  the  quotations  are  reported  as  soon  after  they  are 
made  as  it  is  possible  to  gather  them,  it  takes  some  time,  of 
course,  to  get  them  to  the  indicator,  and  it  follows  that  the 
ticker  is  always  a  little  behind  the  actual  market.  On  an 
ordinary  day  the  difference  in  time  between,  say,  the  close 
of  the  market  and  the  record  of  the  final  sales  on  the  tape 


TOOLS   OP   WALL  STREET  135 

may  not  amount  to  more  than  one  or  two  or  three  minutes, 
but  on  a  vei'y  active  day,  when  the  transactions  are  heavy,  it 
has  taken  the  ticker  ten  minutes  and  even  more  to  record 
the  accumulation  of  sales.  The  speed  with  which  the  sales 
made  in  the  Exchange  reach  the  public  is  marvelous,  arid 
proves  the  perfection  of  the  system  employed.  Occasion- 
ally a  mistake  is  made,  but  there  is  always  a  swift  correction. 
As  there  are  more  than  four  hundred  different  stocks 
and  bonds  more  or  less  regularly  traded  in  at  the  Exchange, 
many  of  them  bearing  the  long  names  of  their  corporations, 
it  is  necessary  to  use  abbreviations  in  reporting  quotations 
on  the  tape.  To  the  uninitiated  the  tape  appears  to  be  a 
meaningless  jumble  of  letters  and  figures  almost  as  unde- 
cipherable as  a  cable  code  or  Egyptian  hieroglyphics.  But 
the  broker  and  regular  habitue  of  the  Street  learns  to  read 
it  as  readily  as  a  priest  reads  his  Latin.  A  large  chart  con- 
taining the  abbreviations  goes  with  each  ticker,  but  it  is 
rarely  consulted.  Here  are  the  abbreviations  used  for  a  few 
of  the  more  active  stocks  : 

S  The  American  Sugar  Refining  Company. 

ACP  Amalgamated  Copper  Company. 

ST  Chicago,  Milwaukee  &  St.  Paul. 

RI  Chicago,  Rock  Island  &  Pacific. 

CEX  Xew  York  Central  &  Hudson  River. 

A  Atchison,  Topeka  &  Santa  Fe. 

RG-  Philadelphia  &  Reading. 

W  Western  Union  Telegraph. 

U  Union  Pacific. 

MP  Missouri  Pacific. 

2s  U.  S.  2s  Con.  1930. 

PR  Preferred. 

X  Ex-coupon  Dividend  or  Interest. 

UR  Under  the  Rule. 

In  view  of  the  great  volume  of  business  during  the  past 
two  years,  it  has  been  necessary  to  abbreviate  many  of  the 
abbreviations  so  as  to  be  able  to  report  all  the  sales  swiftly. 

Several  of  the  abbreviations  are  responsible  for  the 
popular  Street  nicknames  of  leading  stocks.  For  instance, 


136  THE  WORK  OP  WALL   STREET 

because  MP  stands  on  the  tape  for  Missouri  Pacific,  that 
stock  is  generally  called  "  Mop."  NP  stands  for  Northern 
Pacific,  which  goes  by  the  name  "  Nipper,"  the  common 
being  called  "  little  "  and  the  preferred  "  big."  PO  stand- 
ing for  People's  Gas  Light  and  Coke  Company,  that  stock 
is  often  called  "  Post-office."  The  same  law  of  economy 
in  the  use  of  words  applies  to  all  the  active  stocks. 

On  page  137  is  a  section  of  a  stock  tape  just  as  it 
comes  from  the  ticker. 

This,  being  interpreted,  reads :  St.  Louis  &  San  Fran- 
cisco preferred  stock,  200  shares  at  76 ;  St.  Louis  &  San 
Francisco,  common,  100  shares  at  64^ ;  Standard  Rope  and 
Twine  income  bonds,  10  at  7f ;  Chicago,  Milwaukee  &  St. 
Paul  common  stock,  100  shares  at  161f ;  United  States 
Steel  preferred  stock,  200  shares  at  94^;  100  shares  do.  at 
94f ;  Reading  first  preferred  stock,  200  shares  at  81£ ;  At- 
chison  Adjustment  bonds,  66  at  92f ;  St.  Louis  &  South 
Western  first  bonds,  20  at  99  ;  Chicago,  Milwaukee  &  St. 
Paul  stock,  100  shares  at  161|-;  St.  Louis  &  San  Francis- 
co second  preferred  stock,  100  shares  at  76 ;  Glucose  Sugar 
Refining  Company  stock,  100  shares  at  45f ;  Kanawha  & 
Michigan  Railway,  35f  bid,  offered  at  36 ;  Atchison  pre- 
ferred stock,  100  shares  at  97-J ;  Union  Pacific  stock,  100 
shares  at  lOOf ;  St.  Louis  &  San  Francisco  common  stock, 
100  shares  at  64-J ;  do.  second  preferred,  100  shares  at  76 ; 
Chicago,  Burlington  &  Quincy  4s,  14  bonds  at  96£; 
Standard  Rope  and  Twine  income  bonds,  bid  7f ,  offered  8 ; 
American  Sugar  stock,  100  shares  at  121 ;  Chicago,  Mil- 
waukee &  St.  Paul  stock,  100  shares  at  161f ;  200  shares 
do.  at  162 ;  Mexican  Central  Railway  stock,  bid  26f,  offered 
at  27 ;  St.  Louis  &  San  Francisco,  second  preferred  stock, 
100  shares  at  76. 

"  The  letters  and  figures  used  in  the  language  of  the 
tape,"  says  a  noted  Boston  operator,  "  are  very  few,  but 
they  spell  ruin  in  ninety-nine  million  ways." 

Notwithstanding    the    abbreviations,    the    number    of 


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138 


THE  WORK   OF   WALL  STREET 


printed  impressions  every  day  is  very  large,  although  much 
less  than  the  number  of  shares  sold.  For  instance,  on 
April  30,  1901,  when  3,234,339  shares  were  sold,  besides  a 
large  number  of  bonds,  the  printed  impressions  on  the  tape 
numbered  79,200.  The  New  York  Quotation  Company 
has  a  delicate  little  machine  for  taking  an  accurate  count 
of  the  characters  printed  on  the  tape,  and  it  has  kept  a 
record  for  a  number  of  years  past.  The  record  is  as  follows : 


YEAR. 

Number  of  shares  traded  in. 

Number  of  impressions 
on  stock  tape. 

1890  .  .  . 

71  282  885 

7  200,000 

1891  

69  031  689 

7,200  000 

1892. 

85  875  092 

7  104  000 

1893  

80  977  839 

6  900,700 

1894  

49.075  062 

5  500  000 

1895  

66,583  232 

6  814.900 

1896  

54  654  096 

6,324  000 

1897  

77,324172 

8232000 

1898  

90  468  213 

10,324  600 

1899  

173,912,086 

11,931.700 

1900  

138  312  266 

10217100 

1901  

252,723,292 

12,830,500 

Last  year  it  took  ninety-nine  thousand  pounds  of  paper 
to  supply  the  thousand  tickers  of  the  New  York  Quotation 
Company. 

The  chart  on  the  opposite  page,  while  applying  only  to 
the  number  of  printed  impressions  on  the  tape,  is  given 
because  it  is  also  valuable  as  showing  the  volume  of  stock 
and  bond  transactions  in  the  past  eleven  years.  As  the 
sales  are  almost  always  heaviest  in  the  bull  years,  the  chart 
may  be  taken  as  a  bird's-eye  view  of  the  stock  market  since 
1890. 

The  ticker,  among  its  other  offices,  is  a  timekeeper  for 
the  Street.  The  rule  for  delivery  of  stocks  being  very 
strict,  and  the  time  for  delivery  expiring  at  2.15  P.  M.,  the 
ticker  every  day  at  fourteen  minutes  after  two  prints 
"  time  "  on  the  tape,  and  shortly  after  the  instrument  gives 
fifteen  distinct  beats,  at  the  end  of  which  it  is  exactly 


TOOLS  OP  WALL  STREET 


139 


settlement  time.     Nearly  every  timepiece  in  the  Street  is 
regulated  by  the  tape. 

Besides  the  thousand  stock  tickers  operated  by  the  New 
York  Quotation  Company,  the  Gold  and  Stock  Company 
operates  about  seven  hundred  and  fifty,  rented  to  customers 
in  Manhattan,  Brooklyn,  and  Jersey  City.  No  one  can  rent 
one  of  these  machines  whose  name  has  not  been  approved 
by  a  committee  of  the  Exchange.  This  rule  is  being 


t=f 


Years  18'JO    1801   1SW    1S93   139i   18'Jj    1806   1897    1898    1899    1900   1901 

Chart  showing  number  of  impressions  on  tape. 

observed  to  prevent  the  tickers  being  placed  in  bucket- 
shops.  Besides  the  stock  tickers,  there  are  one  hundred 
machines  reporting  the  grain  and  produce  quotations  of  the 
New  York  Produce  Exchange,  one  hundred  giving  the 
quotations  of  the  Chicago  Board  of  Trade,  fifty  giving  the 
quotations  of  the  Cotton  Exchange,  and  twenty-five  report- 
ing the  quotations  of  the  Coffee  Exchange.  There  are  also 
upward  of  seven  hundred  other  tickers  supplying  financial, 
sporting,  and  general  news.  Some  of  these  tickers  print  the 
news  on  a  broad  ribbon  of  paper  just  as  if  it  had  come  from 
a  typewriter.  Outside  of  New  York  there  are  twenty  cities 
which  have  ticker  services  of  their  own.  No  better  proof 
is  needed  of  the  universality  of  speculation. 

The  Stock  Exchange  reports,  but  does  not  guarantee  its 


140  THE  WORK   OF  WALL  STREET 

quotations.  Every  day  at  the  close  of  the  market,  a  printer, 
as  a  private  business  enterprise,  publishes  a  complete  record 
of  the  day's  transactions.  This  is  a  semiofficial  but  not  an 
official  quotation  list.  The  printer  has  the  authorization  of 
the  Exchange,  and  he  is  obliged  quickly  to  correct  every 
error.  The  list  as  a  matter  of  fact  is  correct,  but  it  is  not 
an  official  record.  Moreover,  the  Exchange  keeps  no  official 
statistics.  The  assistants  of  the  Secretary,  Mr.  Burnham 
and  Mr.  Burns,  have  for  twenty  years  kept  a  record  of  total 
stock  and  bond  sales  by  days,  weeks,  months,  and  years,  but 
this  has  been  done  as  a  matter  of  convenience  to  the  finan- 
cial writers  and  does  not  carry  the  stamp  "  official." 

Of  the  value  to  Wall  Street  of  the  telegraph  it  is  hardly 
necessary  to  speak,  so  universal  has  become  the  use  of  this 
great  tool  of  business.  Dr.  Norvin  Green,  a  few  years  ago, 
estimated  that  one  person  out  of  sixty  in  the  United  States 
made  use  of  the  telegraph,  and  that  46  per  cent  of  all 
the  messages  transmitted  applied  to  speculative  transac- 
tions. In  this  estimate,  however,  he  included  messages 
relating  to  the  race-tracks.  The  percentage  of  speculative 
messages  has  undoubtedly  increased  since  this  estimate  was 
made.  As  Wall  Street  is  the  hub  of  the  great  wheel  of 
speculation,  the  extent  of  the  use  of  the  telegraph  there 
is  obvious. 

Many  brokers  lease  wires  to  connect  their  Wall  Street 
offices  with  branches  in  other  parts  of  the  city  and  country. 
One  firm  leases  twelve  private  wires,  paying  the  telegraph 
company  $55,000  a  year  for  this  service.  Another  firm 
paid  last  winter  a  large  sum  for  a  private  wire  connecting 
with  a  branch  at  Palm  Beach. 

The  cable  may  be  said  to  have  almost  revolutionized  the 
commerce  of  the  world.  The  transactions  and  prices  of  one 
market  are,  by  its  use,  now  known  simultaneously  in  the 
markets  of  every  other  country.  Distance  and  time  have 
been  annihilated.  "  We  are  of  opinion,"  says  Arthur 
Crump,  in  his  Theory  of  Stock  Speculation,  "  that  the  com- 


TOOLS  OF  WALL  STREET  141 

plete  communication  that  is  now  established  between  the 
commercial  and  monetary  markets  will  tend  gradually,  if 
not  rapidly,  to  diminish  the  effect  of  the  commercial  crisis." 

The  cable  has  put  every  market  on  a  contemporaneous 
basis.  The  death  of  McKinley  at  Buffalo  and  that  of  Cecil 
Rhodes  in  South  Africa  was  known  in  every  great  city  of 
the  world  almost  as  soon  as  each  event  occurred ;  but 
seventy -five  years  ago  the  news  of  the  death  of  Nathan 
Meyer  Rothschild  was  carried  to  the  London  Stock  Ex- 
change by  carrier  pigeons.  Several  London  brokers  then 
maintained  private  systems  of  carrier  pigeons  connecting 
them  with  Paris.  This  was  the  early  substitute  for  the 
cable. 

James  K.  Medbury,  writing  three  or  four  years  after  the 
establishment  of  the  first  working  cable  in  1866,  the  one 
laid  eight  years  earlier  having  broken  down,  said  that  New 
York  brokers  were  then  paying  $1,000,000  a  year  for 
London  despatches.  Rates  were  very  high  in  1866. 
Twenty  words  to  London  cost  $100,  as  compared  with 
$5  to-day,  and  George  Stoker,  the  cable-packer,  began, 
by  a  system  of  codes,  to  pack  several  messages  into 
one.  In  1902,  according  to  Yice-President  Ward  of  the 
Commercial  Cable,  fully  95  per  cent  of  all  cable  mes- 
sages are  written  in  codes,  so  constructed  as  to  make  one 
word  do  the  work  of  five  and  even  twelve.  Elaborate 
codes  have  been  constructed,  and  by  the  aid  of  the  Western 
LTnion  Code  book  one  can  cable  and  telegraph  to  any  part  of 
the  world,  securing  economy  with  secrecy.  Many  concerns, 
moreover,  have  private  codes. 

The  manager  of  one  of  the  leading  cable  companies  esti- 
mates that  thirty  per  cent  of  all  the  cable  business  of  this 
country  emanates  from  Xew  York.  How  large  Wall  Street's 
share  of  this  is  may  be  judged  from  the  fact  that  on  an 
average  there  are  one  thousand  Wall  Street  cable  messages 
a  day.  While  most  cable  messages  are  short,  averaging 
four  to  six  words,  they  tell  a  great  deal.  A  banking  house 


142  THE  WORK  OF  WALL   STREET 

will  sometimes  pack  a  dozen  or  more  cable  transfers  of 
money  into  one  message.  For  the  arbitrage  business  an 
express  wire  is  needed.  A  cable  company  sets  aside  one  of 
its  London  cables,  during  business  hours,  for  this  work.  In 
the  new  Exchange  building  telegraph  and  cable  messages 
will  be  sent  by  pneumatic  tubes  direct  from  the  Board  room 
to  the  telegraph  offices. 

In  no  other  part  of  the  world  is  the  telephone  put  to 
such  general  and  important  use  as  in  AVall  Street.  Of  the 
seventy-five  thousand  telephones  on  Manhattan  Island, 
more  than  one-fifth  are  in  offices  below  City  Hall.  About 
five  hundred  of  the  members  of  the  Stock  Exchange  main- 
tain private  telephone  connection  to  the  Board  room.  Prac- 
tically every  order  executed  in  the  Exchange  is  received 
by  the  Board  member  from  his  office  over  the  telephone, 
and  as  soon  as  the  order  is  executed  he  reports  the  sale,  the 
price,  and  the  name  of  the  other  party  to  the  transaction 
over  the  telephone.  Business  aggregating  often  over  $100,- 
000,000  a  day  is  thus  actually  transacted  by  telephone 
— a  most  impressive  proof  of  the  value  of  this  inven- 
tion, now  in  use  only  twenty-five  years.  In  the  new  Ex- 
change elaborate  provision  has  been  made  for  an  even  more 
extended  use  of  the  telephone.  Notwithstanding  the  noise 
and  confusion  on  the  floor,  and  the  fact  that  many  brokers 
are  shouting  through  the  telephone  at  the  same  time,  mis- 
takes are  very  rare.  One  was  made  a  short  time  ago  when 
a  broker  mistook  an  order  to  buy  as  one  to  sell.  The  error 
cost  him  thousands  of  dollars.  The  mistakes  over  the  tele- 
phone, however,  are  probably  no  greater  than  occur  in 
written  communications. 

"Wall  Street  is  always  eager  for  the  latest  news.  It  is 
not  content  to  rely  on  the  morning  and  evening  editions  of 
the  daily  papers,  or  even  upon  the  elaborate  articles  of  the 
financial  press.  It  must  have  the  news  the  instant  it  devel- 
ops. Xews  is  the  very  air  that  speculation  breathes.  To 
supply  this  need,  two  news  agencies  exist  in  AVall  Street, 


TOOLS  OF  WALL  STREET  143 

one  that  of  the  New  York  News  Bureau,  and  the  other  that 
of  Dow,  Jones  &  Company,  founded  by  Charles  H.  Dow, 
one  of  the  first  to  give  a  scientific  form  to  stock-market  re- 
ports. These  two  concerns  issue  every  few  minutes  what 
are  called  the  News  Slips,  which  in  the  case  of  one  firm  are 
printed  on  yellow  paper  and  in  the  case  of  the  other  on 
white.  These  slips  are  of  convenient  size,  are  printed  on 
rapid  presses,  and  are  distributed  to  subscribers  by  an  army 
of  messengers.  The  brokers  keep  the  slips  in  pads,  thus 
having  at  all  times  a  complete  record  of  the  day.  The 
whole  world  is  covered  by  the  slips  and  every  item  of  gen- 
eral news  is  given,  but  especial  attention  is  paid  to  railroad 
earnings,  crop  reports,  and  other  matters  bearing  directly 
upon  the  market. 

The  first  regular  daily  stock  market  report  appeared  in 
London  in  1825,  and  the  New  York  papers  were  quick  to 
copy  after  their  London  contemporaries.  It  has  only  been 
within  a  generation,  however,  that  the  market  report  has 
become  almost  a  science  requiring  mastery  not  only  of  the 
current  influences  affecting  speculation,  but  also  of  the 
fundamental  economic  principles  underlying  business. 

The  market  report  performs  this  special  service  for  the 
banker,  the  broker,  and  the  operator.  It  saves  him  much 
of  the  trouble  and  time  of  analyzing  reports  and  statements, 
and  of  interpreting  movements.  This  is  the  special  func- 
tion of  trade  journalism.  The  business  man  would  require 
a  large  reference  library  and  several  clerks  to  obtain  for 
himself  the  information  which  is  now  furnished  for  him  by 
the  experts  who  write  the  leading  market  reports.  To 
William  Dodsworth  the  Street  owes  no  small  debt  for  ele- 
vating the  standard  of  financial  journalism. 

It  was  recently  computed  by  the  New  York  Times  that 
the  commercial  and  financial  articles  and  market  reports 
published  every  year  in  the  daily,  weekly,  and  monthly  pub- 
lications of  this  country  would  make  nearly  two  hundred 
and  seventy-one  million  books  of  the  size  of  David  Ilarum. 
11 


14:4  THE  WORK  OF  WALL  STREET 

More  than  one-fifth  of  everything  published  relates  to 
business. 

As  long  ago  as  1692  J.  Houghton  published  in  Lon- 
don a  weekly  review  of  the  commercial  operations  of  that 
time,  and  it  was  from  this,  one  of  the  earliest  of  financial 
publications,  that  Macaulay,  many  years  later,  obtained  the 
materials  for  his  account  of  the  stock  speculations  near  the 
end  of  that  century. 


CHAPTER  XI 

LANGUAGE    OF   WALL    STREET 

EVEKY  trade  has  its  own  vernacular  of  technical  terms, 
but  the  language  of  Wall  Street  is  especially  full  and  rich. 
It  has  in  addition  to  many  technical  words  an  argot  of 
slang,  often  very  expressive  of  the  meaning  to  be  conveyed, 
but  sometimes  puzzling  to  the  uninitiated.  So  many  are 
its  technical  and  slang  terms  that  glossaries  have  been  pub- 
lished giving  definitions.  One  of  these  contains  a  list  of 
four  hundred  words  and  phrases  in  common  use  in  the 
Street,  and  even  this  is  not  complete.  The  significance  of 
the  more  important  of  the  terms  is  indicated  in  appropriate 
places  in  the  different  chapters  of  this  book  as  being  more 
convenient  for  the  reader,  but  it  is  necessary  to  bring  some 
of  them  together  so  that  their  related  meaning  may  be  better 
understood  and  appreciated. 

"Wall  Street  employs  many  terms  to  describe  the  differ- 
ent persons  engaged  in  the  stock  and  money  markets,  in 
speculation  and  investment.  Thus  there  are  bankers,  bro- 
kers, principals,  investors,  speculators,  operators,  profession- 
als, manipulators,  lambs,  the  public,  insiders,  outsiders, 
bulls,  bears,  plungers,  scalpers,  room  traders,  specialists, 
cliques,  combines,  pools,  and  syndicates. 

Other  terms  apply  to  the  character  of  the  stock-market. 
This  market,  we  are  told,  is  either  strong  or  weak,  firm, 
steady  or  soft,  rigged  or  stagnant,  active  or  inactive,  in  a 
Hurry  or  panic  or  boom.  Prices  rise  and  fall,  advance  and 
decline,  rally,  recover,  react,  drop,  and  slump.  They  advance 

145  * 


146  THE  WORK  OF  WALL  STREET 

and  decline  by  points.  A  stock  is  cornered,  pegged,  manipu- 
lated, pyramided,  or  ballooned. 

Other  terms  describe  the  position  of  different  classes  of 
persons  in  the  market.  Bulls  and  bears  are  either  long  or 
short.  They  have  straddled  or  hedged.  They  have  loaded 
or  covered  or  realized,  as  the  case  may  be.  They  have  taken 
a  flier  or  have  been  frozen  or  wiped  out.  Shorts  may  be 
squeezed.  The  lambs  may  be  sheared.  The  bears  may 
make  a  drive  or  they  may  be  gunning  a  stock.  Insiders 
may  be  planning  a  deal.  The  broker  may  be  kite-flying. 
The  speculator  may  have  bought  a  put  or  call  or  spread. 
The  banker  may  make  a  specialty  of  arbitrage  business. 
The  customer  may  give  a  stop  order.  lie  may  have  cop- 
pered a  tip.  The  pool  may  be  selling  out.  The  syndicate 
may  be  washing  sales  by  matched  orders  through  curb 
brokers  in  order  to  market  watered  stock. 

Other  terms  apply  to  the  routine  of  the  broker  and  the 
various  tools  he  employs.  He  executes  an  order.  He 
demands  more  margin  from  his  customer.  He  makes  out 
a  comparison  or  exchange  slip  and  makes  delivery.  He 
clears  his  stock.  lie  hypothecates  his  security.  He  keeps 
his  balance  good  at  the  bank.  He  gets  his  checks  certified. 
He  carries  his  securities  on  loans.  He  renders  a  statement, 
He  consults  the  tape  and  the  news  slips  and  the  bank  state- 
ment. He  will  not  bucket-shop  his  business  or  accept 
discretionary  orders.  He  will  not  split  his  commissions. 
If  he  suspends,  he  is  sold  out  under  the  rule. 

Something  must  be  said  in  further  explanation  of  these 
terms.  The  terms,  speculator  and  operator,  are  practically 
synonymous,  except  that  operator  generally  applies  to  a  pro- 
fessional. A  professional  may  or  may  not  be  a  manipulator, 
but  a  manipulator  is  always  a  professional.  The  customer 
is  the  broker's  principal.  The  broker  is  his  customer's 
agent.  Lambs  are  always  outsiders,  but  not  all  outsiders 
are  lambs.  Public  is  a  collective  term  for  outsiders  who  do 
not  speculate  as  a  regular  business,  but  enter  the  market  in 


LANGUAGE  OP  WALL  STREET  147 

large  numbers  in  bull  movements,  and  remain  out  of  it  in 
times  of  stagnation  or  weakness.  Bulls  are  always  long  of 
stock.  When  they  sell  they  realize  or  liquidate.  Bears  are 
always  short  in  the  market,  and  they  realize  their  profits 
by  covering.  Scalpers  are  room  traders  who  buy  and  sell 
stocks  on  the  narrowest  profit,  the  difference  in  their  favor 
being  not  more  than  •§•  or  J  of  1  per  cent.  A  tip  is  cop- 
pered by  acting  contrary  to  the  information  it  conveys.  A 
pool  is  a  combination  of  operators  who  make  a  common 
contribution  for  the  purchase  of  a  stock  or  stocks  and  divide 
the  profits,  if  any.  A  blind  pool  is  one  in  which  all  the 
members  are  kept  in  ignorance  of  its  operations,  except  the 
one  who  manages  it.  A  deal  is  the  operation  resulting 
from  a  secret  combination  or  agreement  among  "Wall  Street 
men  to  effect  a  certain  purpose,  generally  of  a  manipulated 
character  in  the  market.  A  corner  is  the  consequence  of 
bears  selling  more  stock  than  is  issued  or  than  can  be  pur- 
chased in  the  market,  so  that  they  can  not  make  delivery 
and  are  obliged  to  settle  at  high  figures  involving  heavy 
losses. 

A  market  is  steady  when  it  holds  its  own.  It  is  firm 
when  it  advances,  and  is  strong  when  the  gains  are  large. 
It  is  soft  when  it  inclines  to  fall,  and  is  weak  when  it 
declines.  It  is  inactive  when  the  sales  are  decreasing,  and 
stagnant  when  the  volume  of  trading  is  very  small.  Flurries 
and  slumps  are  severe  breaks  in  prices,  that  do  not  reach 
the  dimensions  of  a  panic.  A  market  is  rigged  when  it  is 
manipulated.  It  reacts  from  an  advance.  It  rallies  or 
recovers  from  a  decline.  A  point  is  1  per  cent.  A  stock 
is  pegged  when  its  price  is  held  at  a  certain  figure  so  that 
it  can  not  decline.  Kite-flying  is  the  act  of  unduly  extend- 
ing one's  credit,  and  the  term  generally  conveys  the  idea  of 
a  criminal  transaction  like  the  issue  of  fictitious  or  fraudu- 
lent paper. 

Pyramiding  is  only  possible  in  a  bull  market.  A  man  on 
a  slender  margin  buys  a  few  shares  of  stock,  and  as  the 


148  THE   WORK  OF  WALL  STREET 

price  advances  uses  his  profit  to  buy  more  and  still  more, 
until  on  the  original  investment  of  a  few  dollars  he  has  a 
paper  profit,  it  may  be,  of  thousands  of  dollars.  Thus, 
stories  are  told  of  men  who  on  an  original  purchase  of  fifty 
shares  realized  profits  of  $200,000.  Usually,  however, 
these  inverted  pyramids  are  overturned  by  some  sudden 
reaction  in  the  market  before  the  speculator  is  content  to 
turn  his  paper  profits  into  cash. 

A  ballooned  stock  is  one  whose  market  price  has  been 
unduly  inflated  by  manipulation. 

An  operator  has  straddled  the  market  when  he  has  got 
on  both  sides  of  it  at  once,  the  same  as  a  gambler  hedges 
his  bet.  He  is  taking  a  flier  when  he  buys  or  sells  for  a 
quick  turn.  He  guns  a  stock  or  makes  a  drive  when  he 
tries  to  break  its  price  so  as  to  compel  the  longs  to  unload. 
Shearing  the  lambs  is  the  Wall  Street  method  of  relieving 
novices  of  the  money  they  have  invested  in  speculation. 
The  margins  being  exhausted,  the  lambs  return  to  the  slow 
but  sure  profits  of  their  regular  avocations.  Wash  sales  are 
fictitious  sales  for  the  purpose  of  making  fictitious  prices. 

Puts,  calls,  and  spreads  are  what  are  called  privileges ; 
they  are  essentially  bets  on  prices.  When  one  buys  a  put 
he  is  practically  betting  that  the  price  of  a  certain  stock 
will  decline.  Some  operators  much  prefer  to  buy  puts 
than  to  sell  short.  When  one  buys  a  call  he  bets  the  price 
will  advance.  While  the  put  or  call  specifies  the  number  of 
shares  to  be  delivered  or  called,  there  is  no  actual  transfer 
of  stock  on  them.  A  put  is  a  privilege  to  deliver  within  a 
certain  specified  period  a  specified  number  of  shares  at  a 
specified  price.  If  the  market  declines,  the  holder  of  the 
put  has  a  chance  to  buy  the  stock  and  deliver  at  the  higher 
price  named  in  the  put,  but  as  a  matter  of  fact  the  transac- 
tion is  closed  by  the  payment  of  the  difference  in  the  prices. 
A  call  is  the  reverse  of  this  operation.  In  this  case  the 
holder  of  the  privilege  can  call  on  the  person  issuing  it  for 
a  specified  number  of  shares.  If  the  market  price  has 


LANGUAGE   OF  WALL  STREET  149 

advanced  above  the  price  named  in  the  call  there  is  a  profit. 
A  spread  is  a  combination  of  put  and  call.  The  holder  has 
a  privilege  to  deliver  at  one  price  or  to  call  at  another. 
For  these  privileges  the  buyer  pays  a  sum  varying  with  the 
time,  amount,  and  price  named  in  the  paper.  If  the  market 
fails  to  move  as  he  expects,  the  buyer  of  the  privilege  is 
out  of  pocket  the  amount  he  has  paid  for  it. 

Wall  Street  has  a  variety  of  words  that  describe  certain 
stocks  or  classes  of  stocks.  Thus  there  are  industrial, 
franchise,  traction,  granger,  and  coal  stocks.  The  "  Big 
Four  "  is  the  stock  of  the  Cleveland,  Cincinnati,  Chicago 
&  St.  Louis.  The  "Xickel  Plate"  is  the  Kew  York, 
Chicago  &  St.  Louis  Railroad.  The  "  Pan-Handle  "  is  the 
Pittsburg,  Cincinnati,  Chicago  &  St.  Louis  Railroad.  The 
"  Monon  "  is  the  Chicago,  Indianapolis  &  Louisville  Rail- 
road. When  the  Wall  Street  man  speaks  of  "  Sugar,"  he 
generally  means  not  the  raw  nor  the  refined  product,  but 
the  stock  of  the  American  Sugar  Refineries  Company. 
When  he  speaks  of  St.  Paul,  he  refers  not  to  the  great 
Apostle  or  to  the  city  of  that  name,  but  to  the  stock  of  the 
Chicago,  Milwaukee  &  St.  Paul  Railroad. 

When  a  railroad  stops  paying  dividends,  it  "  passes  its 
dividend."  When  the  books  of  a  company  have  closed  for 
the  payment  of  a  dividend,  the  stock  sells  ex-dividend — that 
is  to  say,  the  purchaser  does  not  receive  the  dividend.  A 
stock  sells  at  par  when  its  quotation  is  100.  It  is  above  or 
below  par  by  as  much  as  it  sells  above  or  below  100.  Car- 
rying charges  are  the  cost  of  carrying  stocks  bought  on 
margin — that  is,  the  interest  paid  to  the  broker  on  the  amount 
he  advances.  Rights  are  frequently  dealt  in  on  the  stock 
market.  When  a  company  issues  new  stock  it  generally 
gives  its  stockholders  the  right  to  subscribe  at  a  figure  con- 
siderably lower  than  the  market  price.  Rights  are  there- 
fore valuable  and  are  bought  and  sold  like  stock.  The 
terms  flat  and  premium  are  used  in  the  operation  of  bor- 
rowing stock  as  well  as  in  other  wavs.  If  there  are  many 


150  THE  WORK  OF   WALL  STREET 

borrowers,  the  competition  will  lead  them  to  give  full  value 
for  the  stock  without  interest ;  that  is  flat.  Or  if  there  is  a 
great  scarcity  of  stock  the  borrowing  demand  establishes  a 
premium  for  it.  If  more  than  par  is  bid  for  a  new  issue  of 
bonds,  it  is  said  that  the  premium  is  so  much.  If  the  coun- 
try has  suspended  gold  payments,  gold  then  commands  a 
premium  over  currency. 

The  Consol  certificate  is  the  latest  of  Wall  Street  terms. 
These  are  certificates  issued  by  the  National  City  Bank  to 
represent  interests  in  "the  Consolidated  Fund  of  the  United 
Kingdom  of  Great  Britain  and  Ireland,"  or,  in  other  words, 
the  National  funded  debt  of  England,  or  "  consols,"  as  they 
are  everywhere  called.  The  bonds  are  registered  in  the 
books  of  the  Bank  of  England  in  the  name  of  the  Union 
Bank  of  London  and  Baring  Bros.  &  Company,  and  held 
by  them  on  behalf  of  the  City  Bank,  which  issues  certifi- 
cates to  represent  them  indorsed  by  the  Farmers'  Loan  and 
Trust  Company.  These  certificates  are  now  traded  in  as 
readily  as  consols  are  in  London,  and  they  may  be  listed  by 
the  Stock  Exchange. 

A  term  that  has  come  into  common  use  in  Wall  Street 
in  the  past  five  years  is  "communities  of  interests."  This 
term  is  the  legitimate  offspring  of  the  "  gentlemen's  agree- 
ment," which  died  and  was  buried  some  time  ago.  The 
gentlemen's  agreement  was  understood  to  be  an  agreement 
between  railroad  magnates  not  to  cut  rates  or  resort  to 
other  practises  resulting  in  wasteful  competition.  Gentle- 
men's agreements,  however,  were  generally  broken.  Com- 
munities of  interests  are  more  substantial  and  likely  to  be 
more  enduring.  They  consist  in  bringing  about  such  rela- 
tions between  great  moneyed  powers  that  the  interests  of 
one  are  interlaced  with  the  interests  of  the  others,  so  that 
they  shall  all  be  directed  under  a  common  policy  and  for  a 
common  end.  A  remarkable  example  of  a  community  of 
interests  was  recently  reported,  in  which  one  big  combina- 
tion agreed  to  pay  an  amount  equal  to  dividends  on  one- 


LANGUAGE  OF  WALL  STREET  151 

fourth  of  its  capital  to  another  combination,  which  likewise 
agreed  to  pay  a  certain  sum  out  of  its  earnings  to  the  other. 
It  follows  that  each  combination  has  an  interest  in  the  well- 
being  of  the  other,  and  extreme  competition  ceases. 

There  are  a  number  of  terms  used  in  the  London  market 
that  are  never  heard  of  in  Wall  Street,  as,  for  instance,  con- 
tango and  backwardation,  which  refer  to  the  charges  for 
carrying  stocks  to  settlement  day.  Jobbers  is  also  a  Lon- 
don term.  There  are  no  jobbers  in  Wall  Street,  but  stock- 
jobbing is  a  term  in  frequent  use  to  describe  the  operation 
of  buying  and  selling  stocks  for  speculation  accompanied 
by  intrigue  or  manipulation. 

Many  of  the  terms  of  the  stock-market  are  as  old  as 
stock  speculation  itself.  The  two  main  divisions  of  the 
market  have  been  known  as  bulls  and  bears  for  more  than 
two  centuries.  There  have  been  many  conjectures  as  to 
the  origin  of  these  terms.  As  a  bull  lifts  and  throws  an 
object  up  with  his  horns,  that  may  be  the  reason  of  his 
selection  as  a  type  of  speculators  who  buy  for  an  uplift  of 
prices.  As  a  bear  seeks  to  depress  prices,  his  name  may  be 
derived  from  the  verb  to  bear,  meaning  to  press  heavily 
upon.  By  some  it  is  held  to  be  derived  from  the  adjective 
bare,  because  the  bear  having  sold  short  is  bare  of  the  stock. 

'  O 

But  a  century  ago  the  Wall  Street  bear  was  described  as 
being  like  the  hunter  who  sells  a  bear's  skin  before  he  has 
succeeded  in  shooting  the  bear,  and  that  is  about  as  complete 
a  description  as  could  be  given. 

The  argot  of  the  stock-market  has  now  become  a  recog- 
nized part  of  the  language  of  commerce,  and  many  of  the 
terms  are  included  in  the  later  dictionaries. 


CHAPTEE  XII 

THE      CURB     MARKET 

THERE  seems  to  be  a  strange  affinity  between  stock- 
brokers and  curbstones.  For  nearly  a  century  the  stock- 
market  of  London  was  on  the  sidewalks  and  in  the  coffee- 
houses of  'Change  Alley,  and  an  active,  excited  market  it 
was  at  times.  Guizot,  in  his  account  of  "  the  delirium  which 
mastered  all  minds  "  in  Paris  at  the  time  of  the  speculation 
in  John  Law's  Mississippi  Company,  says  that  the  street 
called  Quincarnpoix,  for  a  long  time  devoted  to  the  opera- 
tions of  bankers  and  brokers,  became  the  usual  meeting- 
place  of  the  greatest  lords  as  well  as  of  discreet  burgesses. 
It  was  filled  with  excited  throngs  of  men  all  day.  It  was 
found  necessary  to  close  its  two  ends  with  gates,  which  were 
open  from  (>  A.  M.  to  9  P.  M.  Every  house  harbored  busi- 
ness agents  by  the  hundred,  and  the  smallest  room  was  let 
for  its  weight  in  gold.  The  street  was  indeed  too  small  for 
the  business  crowded  into  it,  and  the  brokers  were  forced 
into  the  Place  Vendome  and  the  gardens  of  the  Hotel  de 
Soissons,  where  they  put  up  booths  for  the  transaction  of 
their  business. 

The  JSTew  York  Stock-Market  was  born  on  the  street. 
The  first  dealings  in  securities  were  under  the  buttonwood 
tree  which  stood  in  front  of  (!S  Wall  Street,  and  ever  since 
that  time,  except  during  periods  of  profound  depression, 
some  part  of  the  stock-market  has  always  been  located  on 
the  sidewalks  and  curbs.  After  deserting  the  shade  of  the 
buttonwood  tree  the  street  brokers  located  themselves  on 
152 


THE  CURB  MARKET  153 

Wall  Street  near  Hanover.  During  the  civil  war  the 
curb  market  was  in  William  Street,  between  Exchange 
Place  and  Beaver,  and  while  no  record  of  transactions  was 
kept,  it  was  believed  that  the  trading  in  the  street  was 
heavier  than  that  in  the  Exchange.  It  began  at  eight 
o'clock  in  the  morning  and  continued  until  6  p.  M.,  or  even 
later,  and  at  night-time  the  market  was  transferred  to  the 
corridors  of  the  Fifth  Avenue  Hotel.  William  Street  at 
that  time  was  almost  continually  impassable  by  reason  of 
the  crowd  of  brokers. 

The  curb  market  now  has  its  regular  meeting-place  in 
Broad  Street,  between  the  Mills  Building  and  the  Cable 
Building,  and  in  stormy  weather  the  brokers  often  seek 
the  shelter  of  the  main  corridor  of  the  Mills  Building.  At 
other  times,  in  cold  of  winter  and  heat  of  summer,  a  hundred 
or  more  brokers,  most  of  them  young  and  athletic,  may  be 
seen  assembled  in  the  street.  A  stranger  might  think  that 
a  small-sized  riot  had  developed,  so  lawless  seems  the  con- 
duct of  these  brokers,  but  they  are  there  for  a  serious  pur- 
pose. There  is  method  in  their  madness,  and  in  the  last 
four  years  they  have  transacted  a  large  amount  of  business — 
how  much  no  one  can  tell,  for  no  records  are  kept.  In 
1809  the  curb  market  assumed  extraordinary  proportions, 
resembling  the  activity  of  the  old  war  times.  There  were 
days  when  over  a  hundred  thousand  shares  were  dealt  in, 
and  sales  of  one  thousand  share  lots  were  not  uncommon. 
In  1901  the  curb  market  was  less  extensive,  but  still  quota- 
tions were  established  for  two  hundred  and  sixty-three  dif- 
ferent stocks  and  bonds. 

Xo  securities  are  traded  in  that  are  admitted  to  dealings 
in  the  Stock  Exchange,  so  that  many  of  the  Stock  Exchange 
houses  have  regular  representatives  in  the  curb  market. 
Here  there  is  speculation  in  securities,  like  the  stock  of  the 
Standard  Oil  Company,  which  have  never  applied  for  ad- 
mission to  the  list  of  the  Exchange.  Here  also  is  the  brief 
abiding-place  of  stocks  between  the  time  of  their  issue  and 


154  THE  WORK  OF  WALL  STREET 

of  their  listing.  For  instance,  United  States  Steel  stocks 
"  to  be  issued  "  were  traded  in  here  before  the  stock  was 
actually  issued  and  listed. 

Trading  in  the  new  bonds  of  the  United  States  Steel 
corporation  was  carried  on  in  the  curb  market  even  before 
the  company  had  decided  to  issue  them,  or  any  one  knew 
what  form  they  would  take,  the  curb  operators  thus  specu- 
lating in  hypothetical  securities  that  might  or  might  no't  be 
issued. 

The  stock  of  the  ^Northern  Securities  Company,  which, 
pending  the  judicial  decision  as  to  the  legality  of  the  com- 
pany, has  not  been  listed,  is  dealt  in  on  the  curb.  The  curb 
trading  is  mainly  in  industrial  stocks,  some  of  them  of 
prominent  corporations,  but  others  that  are  little  known 
and  are  of  a  suspicious  character. 

The  freedom  of  the  market,  the  absence  of  a  habitation 
and  a  name,  are  in  a  way  actually  a  benefit  to  it.  There 
have  been  from  time  to  time  suggestions  of  leasing  a  room 
in  which  to  give  shelter  to  the  brokers,  but  the  fear  of  cre- 
ating anything  that  might  be  construed  as  competition  with 
the  Stock  Exchange  has  blocked  any  movement  in  that  di- 
rection. So  these  curb  brokers  remain  in  Broad  Street,  in 
times  of  activity  prosperous  and  happy,  and  in  times  of 
stagnation  scarcely  able  to  make  both  ends  meet,  but  at 
all  times  the  most  picturesque  spectacle  which  the  financial 
center  presents. 

The  commissions  are  the  same  as  those  for  Stock  Ex- 
change business,  but  as  there  are  no  rules  regulating  the 
business,  no  quotations  reported  over  tickers,  although  they 
are  carried  to  the  offices  in  the  old-fashioned  way,  and  no 
check  on  operations,  it  is  necessary  that  a  broker  should 
know  whom  he  is  dealing  with,  or  to  get  the  name  of  a  re- 
sponsible principal.  Moreover,  a  speculator  desiring  to  buy 
or  sell  in  the  curb  market  needs  to  engage  a  trustworthy 
broker  who  will  be  sure  to  execute  his  orders  faithfully 
without  deviation  from  the  actual  prices.  Transactions  on 


THE  CURB  MARKET  155 

the  curb  can  be  made  on  margin  only  in  case  of  well-known 
and  established  stocks,  otherwise  the  intending  purchaser 
may  be  compelled  to  deposit  an  amount  to  cover  the  entire 
purchase  price. 

Naturally  such  an  unregulated  market  is  more  easily 
manipulated  than  that  of  the  Exchange.  It  is  not  difficult 
to  inflate  prices  there  so  as  to  make  them  appear  worth 
more  than  their  intrinsic  value.  It  was  a  collapse  of 
"  ballooned "  stocks  on  the  curb  in  1902  which  produced 
almost  a  flurry  in  Wall  Street,  and  depressed  prices  in  the 
Exchange  as  well  as  in  the  outside  market.  The  banks, 
in  making  loans,  generally  discriminate  against  stocks  not 
admitted  to  dealings  in  the  Exchange,  but  the  curb  brokers 
manage  to  carry  their  securities  by  means  of  loans  secured 
through  certain  trust  companies  and  banks  in  the  city  and 
through  banks  in  the  interior.  It  does  not  necessarily  fol- 
low that  because  a  stock  is  traded  in  on  the  curb,  it  should 
be  rejected  as  an  investment  or  as  loan  collateral,  but  it 
demands  much  closer  scrutiny  and  good  judgment. 


CHAPTER  XIII 

THE   BROKER   AND    HIS    OFFICE 

"  HE  was  a  broker,"  wrote  Henry  Adams  referring  to 
Jay  Gould  in  Iris  account  of  the  gold  conspiracy,  "  and  a 
broker  is  almost  by  nature  a  gambler,  perhaps  the  very  last 
profession  suitable  for  a  railway  manager.  In  speaking  of 
this  class  of  men  it  must  be  fairly  assumed  at  the  outset 
that  they  do  not  and  can  not  understand  how  there  can  be  a 
distinction  between  right  and  wrong  in  matters  of  specula- 
tion, so  long  as  the  daily  settlements  are  punctually  effected. 
In  this  respect  Mr.  Gould  was  probably  as  honest  as  the 
mass  of  his  fellows,  according  to  the  moral  standard  of  the 
Street,  but  without  entering  upon  technical  questions  of 
roguery,  it  is  enough  to  say  that  he  was  an  uncommonly  fine 
and  unscrupulous  intriguer,  skilled  in  all  the  processes  of 
stock  gambling,  and  passably  indifferent  to  the  praise  or 
censure  of  society." 

But  Mr.  Adams  wrote  this  thirty-two  years  ago,  at  a 
time  when  business  and  political  morals  in  New  York  were 
at  a  very  low  ebb,  and,  moreover,  with  apparently  a  strong 
prejudice  against  Wall  Street,  and  with  little  appreciation 
of  its  great  and  legitimate  functions  in  the  commerce  of  the 
world. 

The  broker  is  the  connecting  link  between  buyers  and 
sellers.  He  is  a  middleman,  one  who  negotiates  sales  or 
contracts  as  an  agent.  The  word  broker  is  old.  The  early 
English  form  was  "broceur."  By  some  it  is  believed  to  be 
derived  from  the  Saxon  word  "broc,"  which  meant  mis- 
156 


THE  BROKER  AND  HIS  OFFICE  157 

fortune ;  and  the  first  brokers  indeed  appear  to  have  been 
men  who  had  failed  in  business  as  principals  and  been  com- 
pelled to  pick  up  a  precarious  living  as  agents.  There  are 
almost  as  many  different  kinds  of  brokers  as  there  are  lines 
of  business.  In  Wall  Street  alone  there  are  stock-brokers, 
investment-brokers,  curb  brokers,  two-dollar  brokers,  grain- 
brokers,  cotton-brokers,  coffee-brokers,  ship-brokers,  insur- 
ance-brokers, money-brokers,  foreign-exchange  brokers, 
bond-brokers ;  and  there  are  large  houses  which  combine 
nearly  all  these  different  kinds  of  brokerage. 

The  stock-broker  is  usually  a  man  possessed  with  a 
superior  endowment  of  brains.  Ko  fool  can  last  long  in 
the  Stock  Exchange.  The  broker,  whether  he  is  the  office 
partner  or  the  Board  member,  requires  alertness,  a  habit  of 
quick  decision,  accuracy,  promptness,  the  ability  to  take 
large  risks  with  good  judgment  and  to  read  character 
readily,  and  a  capacity  of  keeping  cool  in  times  of  excite- 
ment, lie  must  never  lose  his  head,  as  the  saving  is. 

J  v  O 

The  broker  is  narrow  in  the  sense  that  he  looks  at  every- 
thing through  Wall  Street  spectacles.  A  thing  is  good  or 
bad,  wise  or  foolish,  just  as  it  happens  to  affect  the  immedi- 
ate interest  of  the  Street.  If,  for  instance,  the  market  is 
depending  upon  a  United  States  Supreme  Court  decision, 
the  broker  can  not  see  why  the  decision  is  delayed.  If 
there  is  a  strike  in  the  coal  fields,  he  can  not  see  why  the 
operators  and  miners  should  be  so  inconsiderate  as  to 
disturb  the  prices  of  stocks.  He  is  impatient  of  any  con- 
sideration other  than  that  of  his  own  interest.  Still,  that  is 
a  trait  of  human  nature  by  no  means  confined  to  Wall 
Street.  But  the  broker  is  broad  in  another  sense.  The 
Wall  Street  horizon  is  almost  as  wide  as  the  world  itself. 

"  The  operators  in  the  gold  room,"  wrote  Horace  White 
in  his  account  of  the  gold  speculation  of  the  war  time, 
"  should  be  at  the  same  time  the  best  informed  and  the 
most  intelligent  business  men  in  the  country.  They  must 
have  not  only  the  best  and  latest  information,  but  they  must 


158  THE  WORK  OF  WALL  STREET 

be  able  to  determine  at  once  what  is  the  economic  meaning 
and  significance  of  any  given  fact  which  may  come  to  their 
knowledge.  They  must  be  able  to  resolve  the  most  com- 
plicated problems  in  mental  arithmetic  without  a  moment's 
hesitation.  If  the  Secretary  of  the  Treasury  has  decided 
upon  a  certain  measure  of  financial  policy,  or  the  President 
upon  a  certain  measure  of  foreign  policy ;  if  there  is  a  short 
corn  crop,  or  a  Fenian  rebellion,  or  a  war-cloud  in  Europe, 
or  a  heavy  immigration,  or  a  great  oil  discovery,  or  a  change 
in  the  tariff,  or  anything  else  which  can  affect  the  currency 
or  the  public  credit,  they  must  be  able  to  melt  down  the 
mass  and  weigh  the  product  in  terms  of  standard  gold.  This 
is  the  work  of  omniscience.  Xo  man  can  do  it." 

Yet  Mr.  "White's  characterization  of  the  task  of  the  gold- 
broker  of  a  generation  ago  serves  well  to  describe  the  work 
of  the  stock-broker  of  to-day.  He  must  keep  in  touch  with 
every  market  abroad  as  well  as  at  home.  He  must  know 
something  of  the  significance  of  parliamentary  debates  and 
congressional  legislation.  He  studies  bank  statements,  rail- 
road reports,  crop  estimates,  statistics  of  foreign  trade,  and 
the  forces  at  work  in  domestic  and  international  politics. 
As  he  must  give  advice  which  may  make  or  lose  money  for 
his  customers,  he  is  obliged  to  keep  an  intelligent  watch  on 
everything  of  importance  that  is  going  on.  As  he  is  not 
omniscient,  he  often  makes  mistakes.  But  his  grasp  of  the 
world's  affairs  is  firmer  than  that  of  most  other  observers. 

The  broker  is  usually  a  gentleman  and  dresses  well 
and  lives  well.  Sometimes  he  is  something  more  than  a 
broker,  and  becomes  a  power  outside  of  his  own  class. 
Brayton  Ives,  a  former  President  of  the  Exchange,  became 
a  noted  collector  of  books.  Another  President,  A.  S. 
Hatch,  was  a  well-known  worker  in  church  missions.  Still 
another  President,  J.  Edward  Simmons,  was  President  of 
the  Board  of  Education  and  Grand  Master  of  Masons. 
Another  President,  James  D.  Smith,  was  Commodore  of 
the  ISTew  York  Yacht  Club.  S.  Y.  "\Vhite,  besides  being  a 


THE   BROKER  AND  HIS  OFFICE  159 

broker,  is  a  member  of  the  bar  of  the  Supreme  Court,  and 
has  served  in  Congress.  Stedman  is  a  poet.  R.  P.  Flower 
was  Governor  of  the  State.  Bird  S.  Coler  served  as  Comp- 
troller of  the  city.  On  the  whole,  brokers  as  a  class  compare 
well,  mentally  and  morally,  with  other  business  men.  They 
are  always  patriotic,  if  for  no  other  motive  than  that  of  self- 
interest,  for  if  the  Government  went  down  or  suffered  from 
domestic  revolt  or  foreign  invasion,  the  whole  structure  of 
Wall  Street  credits  and  values  would  collapse  like  a  house 
of  cards.  During  the  civil  war  the  Exchange  would  not 
admit  as  member  any  one  suspected  of  aiding  in  the  rebel- 
lion. The  broker  is  proverbially  generous.  When  he 
makes  money  fast,  he  spends  it  freely,  and  his  contributions 
to  charity  are  liberal. 

As  regards  their  relations  to  customers,  brokers  may  be 
divided  into  two  classes  :  first,  those  who  do  a  strictly  com- 
mission business  and  who  are  conservative  in  advice  and 
dealings ;  and  second,  those  who  speculate  on  their  own  ac- 
count as  well  as  for  their  customers,  who  advise  the  taking 
of  long  chances,  and  who  too  often  are  bulls  at  top  prices 
and  bears  at  the  bottom.  It  is  needless  to  say  that  a  wise 
choice  of  a  broker  is  the  first  duty  of  one  who  is  entering 
into  the  stock-market. 

It  is  equally  true  that  the  broker  should  make  a  wise 
choice  of  a  customer ;  for  the  connection  between  brokers 
and  customers  is  as. delicate  as  that  between  attorneys  and 
clients.  Indeed,  some  brokers  use  the  word  clients  in 
speaking  of  their  customers.  If  the  customer  is  mean  and 
unscrupulous,  he  can  make  much  trouble  and  loss  for  his 
broker.  It  is  by  no  means  uncommon  for  a  customer  to 
leave  his  broker  "  in  the  lurch  "  in  time  of  panic  to  bear 
the  loss  which  is  properly  his  own.  Strictly  speaking,  the 
broker  is  simply  the  agent  for  his  customer.  The  latter  is 
the  owner  of  every  share  of  stock  bought  for  him  by 
the  broker,  although  the  broker  is  the  actual  holder  of 

the  stock.      lie  holds   it   as  security  for  the   loan   which 
12 


160  THE  WORK  OF  WALL  STREET 

he  makes  to  the  customer  upon  it.  On  every  $10,000 
purchase  the  customer  puts  up  $1,000  cash.  The  broker 
advances  the  remaining  $9,000  and  charges  the  customer 
interest,  holding  the  stock  as  security  for  the  loan.  The 
customer's  right  in  the  stock,  it  has  been  legally  deter- 
mined, is  "the  right  of  redemption."  He  is  entitled  to 
receive  the  stock  bought  the  moment  he  pays  the  balance 
due  upon  it.  Moreover,  he  is  entitled  to  all  the  dividends 
upon  the  stock  accruing  after  the  purchase,  although  the 
stock  is  in  the  possession  of  the  broker,  who  may  hold  the 
same  on  the  books  of  the  company  in  his  own  name.  The 
broker  has  the  right  to  demand  more  margin  from  his 
customer,  and  if  this  margin  is  not  forthcoming,  after  due 
oral  or  written  notice,  the  broker  can  sell  the  stock  for 
the  account  of  the  customer.  What  is  "  due  notice " 
may  depend  upon  circumstances. 

The  necessities  of  the  stock-market  require  the  broker 
to  do  some  things  which,  in  a  strict  construction  of  law,  it 
might  be  difficult  to  uphold  in  the  courts.  For  instance, 
when  the  broker  pledges  the  stock  he  holds  for  his  customer 
as  security  for  a  loan  at  a  bank,  that  is  rehypothecation. 
Moreover,  it  is  a  general  principle  of  law  that  an  agent 
employed  to  do  a  certain  thing  can  not  employ  another 
agent  to  do  it  for  him.  Yet  it  is  a  common  and  recognized 
practise  for  brokers  to  employ  other  brokers.  The  man 
who  opens  an  account  with  a  broker  tacitly  agrees,  however, 
to  conform  to  the  customs  of  the  stock-market.  lie  is  will- 
ing to  take  advantage  of  the  mechanism  the  Street  has 
created  for  the  transaction  of  its  business,  and  must  there- 
fore not  raise  technical  objections  to  its  methods.  Some 
brokers  have  an  agreement  with  their  customers  that  "  ac- 
counts will  be  carried  on  margin  according  to  the  rules  of 
the  New  York  Stock  Exchange  and  its  members,  with 
authority  to  loan  or  pledge  the  securities  carried  in  bulk  or 
otherwise  for  such  sums  as  we  may  see  lit." 

Eliot  2s  orton,  of  the  Xew  York  bar,  in  a  treatise  on  stock- 


THE   BROKER  AND  HIS  OFFICE  161 

trading  from  the  legal  standpoint,  says  that  when  a  customer 
gives  an  order  to  a  broker  it  is  a  proposition  to  make  the 
broker  his  agent  to  contract  to  buy  or  to  sell,  according  to 
the  rules  and  customs  of  the  Stock  Exchange,  such  securities 
as  are  specified  in  the  order. 

Let  us  now  step  into  a  broker's  office  and  see  what  it 
looks  like,  and  perhaps  open  an  account.  There  are  brokers 
who  have  only  one  customer  or  two,  although  the  business 
of  these  two  may  be  large  enough  to  occupy  his  entire 
energies.  There  was  a  time  not  so  many  years  ago  when  a 
customer  who  carried  a  line  of  thirty  thousand  shares  would 
be  the  talk  of  the  Street,  but  in  the  past  four  years  opera- 
tions have  expanded,  and  a  line  of  one  hundred  thousand, 
and  even  one  hundred  and  fifty  thousand  shares  a  day,  has 
been  not  uncommon.  There  are  brokers  with  small  offices 
and  only  two  or  three  clerks,  and  others  who  hire  only  desk 
room  and  clear  their  business  through  other  members ; 
but  the  office  into  which  the  reader  is  conducted  is  one  of 
the  larger  commission  houses,  that  carry  several  hundreds 
of  accounts,  and  lease  private  telegraph  wires  connecting 
with  branch  offices  uptown  and  in  other  cities.  These 
houses  transact  a  general  banking  as  well  as  brokerage 
business.  They  receive  deposits  of  money,  and  make  loans 
as  well  as  buy  and  sell  securities.  They  have  two  or  three 
Board  members,  and  in  addition  often  employ  other 
brokers.  They  may  have  representatives  on  the  Cotton, 
Produce,  and  Coffee  Exchanges,  and  buy  and  sell  wheat, 
corn,  cotton,  and  coffee  on  margins  and  for  commissions 
the  same  as  they  do  stocks.  They  employ  a  large  staff  of 
clerks,  and  their  annual  expenses  range  from  $60,000  to 
$150,000,  and  even  more. 

As  we  enter  the  extensive  offices  of  one  of  these  large 
houses  we  are  confronted  with  an  arrangement  of  glass  or 
wood  partitions  and  windows,  very  much  like  a  bank. 
Here  are  windows  marked  "Cashier,"  "Deliveries,"  "Com- 
parisons," "  Telegrams,"  and  the  like,  and,  looking  through 


162  THE  WORK  OF  WALL  STREET 

or  over  the  partitions,  we  see  bookkeepers  and  clerks  at 
work.  The  main  principles  of  bookkeeping  are  the  same 
in  any  business,  but  a  broker's  office  requires  a  line  of 
books  and  blanks  peculiar  to  its  special  needs. 

Here  at  one  side  is  a  door  marked  "  Customers,"  and 
through  this  we  enter  a  large  apartment  resembling  the 
library  of  a  private  residence  more  than  a  business  office. 
The  floor  is  carpeted.  On  the  walls  hang  oil-paintings  or 
interesting  engravings  and  etchings.  There  are  upholstered 
chairs  and  couches.  There  are  costly  Oriental  rugs.  There 
are  desks  with  writing  material,  tables  on  which  »are  found 
news  slips  and  the  latest  financial  journals,  a  rack  contain- 
ing files  of  the  Journal  of  Commerce  and  other  daily  news- 
papers, a  bookcase  holding  bound  volumes  of  the  Financial 
Chronicle,  copies  of  Poor's  Manual  for  a  series  of  years, 
and  other  books  of  reference.  On  one  side  are  private 
offices  of  members  of  the  firm.  O.n  the  other,  reaching 
across  the  wall,  is  a  board  containing  movable  blocks  of 
figures  with  which  boys  are  posting  the  quotations  of 
stocks,  grain,  and  cotton  as  fast  as  they  come  out  over  the 

/    <j  /  «/ 

tickers.  Groups  of  customers  sit  in  the  chairs,  their  eyes 
intent  on  the  board,  where  they  are  able  to  see  at  a  glance 
the  ever-changing  position  of  the  great  markets.  It  is  like 
looking  through  a  huge  kaleidoscope,  such  is  the  constant 
movement  of  prices.  Xot  all  the  large  offices  have  this 
arrangement  of  quotation  boards,  but  many  of  them  do. 
The  tickers,  of  course,  are  indispensable  adjuncts  of  every 
office. 

As  we  enter  this  place  we  are  conscious  at  once  of  a 
strange  environment.  If  we  have  never  before  been  in  the 
speculative  arena,  it  is  as  if  we  had  suddenly  entered  into  a 
new  country.  Here  is  a  babel  of  voices ;  we  hear,  but 
understand  not.  The  language  seems  to  be  English,  but  we 
might  as  well  be  listening  to  Chinese.  It  will  be  some  time 
before  we  thoroughly  comprehend  the  argot  of  the  broker's 
office. 


THE  BROKER  AND  HIS  OFFICE  163 

"We  will  suppose  that  we  have  entered  this  office  not 
merely  from  curiosity.  We  have  heard  the  stories  of  mar- 
velous gains  achieved  in  the  stock-market,  and  we  are  moved 
to  make  an  investment.  So  we  ask  to  see  a  member  of  the 
firm.  The  office  partner  greets  us.  The  typical  broker  is 
courteous  in  his  manner,  but  quick  and  terse  in  his  lan- 
guage, sharp  in  the  glance  with  which  he  comprehends  us, 
and  giving  the  impression  of  intense  nervous  force.  "We 
tell  him  that  we  wish  to  open  an  account,  and  ask  his  terms 
and  advice. 

Xow,  no  one  can  make  a  deposit  at  a  bank  without  a  ref- 
erence, and  110  one  can  open  an  account  with  a  broker  with- 
out an  introduction,  or  some  description  of  oneself  that 
will  take  the  place  of  a  personal  introduction.  jSTame,  ad- 
dress, and  business  must  be  made  known.  The  broker  must 
be  satisfied  as  to  the  customer's  standing  before  he  will 
accept  his  business.  In  this  case  we  say  that  we  keep  a 
deposit  at  such  and  such  a  bank,  and  refer  to  its  President 
or  Cashier.  Xo  better  reference  could  be  given.  The 
broker  may  now  acquaint  us  with  the  rule  of  the  Exchange 
governing  commissions,  and  the  custom  of  the  Street  as  to 
margins  and  hypothecations  of  securities.  He  takes  our 
signature,  and  we  make  a  deposit  varying  with  the  size  of 
the  order  we  intend  to  give  and  the  kind  of  security  we 
purpose  to  deal  in.  Having  complied  with  the  terms  of  the 
broker,  we  are  fairly  launched  on  the  sea  of  speculation,  or, 
as  one  Wall  Street  man  naively  says,  "fairly  engaged  in  the 
business  of  losing  money." 

Most  men  enter  "Wall  Street  with  a  predetermined  idea 
of  what  they  want  to  do.  They  have  some  tip  or  informa- 
tion in  regard  to  some  particular  stock  or  some  theory  as  to 
the  movement  of  prices.  In  fact,  many  outsiders  disregard 
their  brokers1  advice  altogether,  and  generally  suffer  by  so 
doing.  But  let  it  be  understood  that  we  are  a  "  lamb  "  or  a 
novice,  in  ignorance  of  the  market,  and  that  we  place  our- 
selves unreservedlv  in  the  broker's  hands.  "We  ask  him  to 


164  THE  WORK  OP   WALL  STREET 

take  our  money  and  invest  it  for  us.  He  flatly  refuses. 
"  We  take  no  discretionary  orders,"  lie  says.  A  discretion- 
ary order  is  one  in  which  the  broker  is  given  authority  to 
buy  or  sell  whatever  stock  he  pleases  at  any  price,  the  cus- 
tomer relying  on  his  honor  and  judgment  to  yield  him  a 
profit.  Discretionary  orders  and  pools  are  common  enough 
in  Wall  Street,  but  few  Stock  Exchange  houses  will  have 
anything  to  do  with  them.  Disappointed  in  this,  we  now 
ask  for  advice. 

~No  two  brokers  adopt  exactly  the  same  policy  in  regard 
to  advising  customers.  Some  are  very  conservative  about 
doing  so.  Others  give  advice  freely.  In  this  case  the 
broker  says  something  like  this  :  "  The  Air  Line  stock 
looks  cheap  ;  it  has  paid  5  per  cent  now  for  two  years, 
and  its  statements  of  earnings  show  steady  gains  from  week 
to  week.  Its  capitalization  is  less  per  mile  than  that  of  the 
Straight  Western  Line,  which  earns  no  more  and  yet  is 
selling  twenty  points  higher.  It  is  beginning  to  advance 
on  what  seems  to  be  good  buying.  I  am  advising  my  cus- 
tomers to  buy." 

We  are  immediately  consumed  with  an  intense  eager- 
ness to  buy  Air  Line,  and  although  we  have  no  idea  where 
the  Air  Line  is,  we  say  that  we  will  take  two  hundred 
shares.  The  broker  then  directs  us  to  till  out  an  order 
blank  as  follows : 

XKW  YORK,  March  1,  1003. 
KiCHAiii)  PiOH  &  COMPAXY,  Bunkers : 

Buy  for  my  account  and  risk  200  Air  Line  at  103. 

Jonx  DOE. 

This  order  is  immediately  telephoned  to  the  Exchange, 
where  the  Board  member  proceeds  to  execute  it.  In  the 
meantime  we  take  our  seat  among  the  other  customers,  and 
finding  Air  Line  on  the  quotation  board,  anxiously  watch 
the  movement  of  its  price. 


THE  BROKER  AND  HIS  OFFICE  165 

As  soon  as  the  broker  has  bought  the  stock  he  serves  us 
with  a  notice  like  this  : 

NEW  YORK,  March  1,  1002. 
JOHIST  DOE,  Esq., 

SIE  :  We  have  bought  for  your  account  and  risk  200  Air 

Line  at  103. 

EICHAKD  EOE  &  COMPANY. 

The  name  of  the  broker  from  •whom  the  stock  is  pur- 
chased is  also  generally  given. 

In  three  or  four  days,  it  may  be,  we  are  delighted  to  see 
the  stock  quoted  at  108,  when  the  broker  calls  us  to  him 
and  suggests  the  propriety  of  our  taking  the  present  profit 
and  selling.  "Money  is  getting  tighter,"  he  says;  "the 
bank  statement  to-morrow  is  likely  to  be  bad.  The  market 
looks  top-heavy.  Your  stock  is  comparatively  low,  but  it 
will  be  affected  by  the  general  decline.  I  advise  a  sale." 
So  we  write  another  order  to  sell  the  two  hundred  shares  at 
market  price,  and  presently  are  informed  that  they  have 
been  sold  at  10T^.  It  may  be  said  here  that  in  giving 
orders  to  buy  or  sell,  if  no  price  is  named,  it  is  always  un- 
derstood to  be  at  "  the  market." 

"We  now  ask  for  a  statement  of  our  account,  and  find 
that  the  transaction  stands  like  this :  two  hundred  shares  at 
103  cost  $20,600.  The  broker  obliged  us  to  deposit  10  per 
cent  margin,  or  $2,060.  Then  in  four  days  we  sell  at  107i, 
or  $21,500.  Our  profit  is  $900  on  an  investment  of  $2,060, 
or  nearly  44:  per  cent.  But  from  this  the  broker  will  deduct 
his  commission  of  $25  on  the  purchase  and  $25  on  the  sale, 
and  will  charge  us  the  prevailing  rate  of  interest  on  $20,600 
for  the  four  days  he  carries  the  two  hundred  shares  for  us, 
allowing  us,  however,  interest  on  the  amount  of  our  deposit 
of  $2,060. 

Frequently  an  operator,  in  order  to  limit  the  amount  of 
possible  loss,  will,  in  giving  an  order  to  buy,  say  at  110, 
specify  that  in  case  the  price  drops,  say  to  106,  the  broker 
shall  sell  without  further  delay.  This  is  what  is  called  a 


166  THE  WORK  OF   WALL  STREET 

"  stop  order."  Bear  operators  sometimes  raid  the  market — 
that  is,  sell  it  freely — in  order  to  depress  prices  to  a  point 
where  stop  orders  will  be  reached.  This  will  force  liq- 
uidation, and  the  bears  are  then  able  to  cover  their  sales  at 
a  profit. 

The  amount  of  margins  demanded  by  a  broker  depends 
on  the  character  of  the  security  traded  in.  An  active  stock 
that  has  a  ready  market  is  safe  to  carry  on  ten  points  mar- 
gin— that  is  to  say,  at  10  per  cent  of  the  market  price — while 
one  that  has  little  or  no  market  is  unsafe  to  carry  on  twenty- 
five  points  margin.  There  are  brokers  who,  in  their  eager- 
ness to  get  business,  will  take  large  risks  by  carrying 
stocks  on  slender  margin,  but  a  well-conducted  office  will 
thoroughly  safeguard  itself  by  demanding  a  sufficient  margin 
in  every  case.  If  after  buying  a  stock  its  price  declines, 
the  broker  will  call  for  more  margin.  In  calculating  the 
interest  charged  a  customer,  the  broker  usually  averages 
what  he  pays  for  his  time  and  call  loans,  and  adds  a  trifle 
for  trouble  and  office  expenses.  If  the  customer  believes 
that  prices  will  decline,  he  will  sell  short  in  order  to  reap  a 
profit  by  buying  at  lower  quotations.  Then  the  broker 
borrows  the  stock  for  him  from  some  other  broker  who  is 
carrying  it.  In  this  case  the  customer  saves  the  interest 
that  attaches  to  a  transaction  on  the  long  side,  for  the  broker 
lending  a  stock  receives  full  market  value  for  it,  and  pays 
interest  on  the  sum  thus  received  at  a  rate  usually  lower 
than  the  bank  rate.  It  is  only  when  there  is  a  short  supply 
of  stock  that  a  premium  has  to  be  paid  to  secure  enough  to 
cover  short  sales. 

The  established  broker's  commissions  for  round  trades, 
that  is  to  say  for  both  buying  and  then  selling,  are :  $25 
per  one  hundred  shares  of  stock ;  $6.25  per  five  thousand 
bushels  of  grain ;  $10  per  one  hundred  bales  of  cotton ; 
and  $20  for  two  hundred  and  fifty  bags  of  coffee.  For 
transactions  one  way  the  commissions  are,  of  course,  one- 
half  the  sum.  The  margins  usually  demanded  on  grain  are 


PLEASE   EX 


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This  account  has  been  and  will  be  carried  on  margin  accordin 
with  authority  to  loan  or  pledge  the  securi 


AMOUNT.  DAYS.  IN 


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New  York,  /u-^/3.  190  / 
ent  with  Richard  Roe  &  Co.,  15  Wall  Street,  Cr. 

the  rules  and  customs  of  the  New  York  Stock  Exchange  and  its  members, 
carried  in  bulk  or  otherwise  for  such  sums  as  we  see  fit. 


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*  This  tax  has  since  been  repealed. 


THE  BROKER  AND  HIS  OFFICE  167 

$250  per  five  thousand  bushels  ;  on  cotton,  $100  per  one 
hundred  bales :  and  on  coffee,  $325  per  two  hundred  and 
fifty  bags. 

A  customer  has  full  control  over  his  account  at  all  times, 
provided  he  keeps  his  margins  good,  and  it  is  a  custom  for 
the  broker  to  notify  him  when  the  margin  becomes  in- 
sufficient by  reason  of  the  movement  in  prices.  The  cus- 
tomer gives  the  order  to  buy  and  the  order  to  sell.  The 
broker  merely  acts  as  his  agent.  But  the  broker  is  bound 
to  protect  himself.  On  days  of  sudden  panic,  when  the 
banks  call  in  their  loans,  and  prices  fall  five,  ten,  and  twenty 
and  sometimes  even  thirty  points  in  a  few  hours,  it  may  be 
impossible  to  reach  the  customer,  or  the  customer  may  pur- 
posely keep  out  of  the  way.  Then  the  broker  may  throw 
the  customer's  stock  on  the  market  for  what  it  will  bring. 
If  he  does  not,  it  is  because  he  feels  sure  of  his  customer, 
or  has  no  time  in  the  excitement  to  clear  out  all  of  the  ac- 
counts, or  believes  that  the  panic  will  soon  run  its  course 
and  prices  return  to  a  normal  basis.  Many  disputes  arise 
over  the  disposition  of  accounts  on  a  day  of  panic,  and 
every  such  day  is  generally  followed  by  a  crop  of  lawsuits 
between  brokers  and  customers.  An  operator  who  deliber- 
ately "  lays  down  on  his  broker  "-—that  is,  lets  his  broker 
carry  the  burden  and  loss  of  his  transactions  in  time  of 
panic,  and  fails  to  make  good  his  differences— may  find  all 
doors  closed  against  him  when  he  seeks  again  to  speculate. 

Customers  may  call  for  statements  of  their  accounts  at 
any  time.  They  are  usually  rendered  once  a  month,  and 
always  when  an  account  is  closed.  Some  customers  prefer 
not  to  have  frequent  statements  in  order  to  avoid  compound- 
ing interest.  A  brokers  statement  is  a  simple  matter  of 
bookkeeping,  similar  to  a  bill  or  statement  that  is  rendered 
by  a  merchant  for  merchandise.  Brokers,  however,  affect 
different  stationery  as  best  suits  their  ideas.  The  accom- 
panying folder  is  a  specimen  statement. 

This  statement  shows  that  John  Doe  has  bought  and 


168  THE  WORK  OF  WALL  STREET 

sold  100  shares  of  Atchison  at  a  profit  of  $850,  less  com- 
mission, interest,  and  tax  ;  and  has  bought  and  is  still  carry- 
ing 100  shares  of  Chesapeake  &  Ohio,  and  200  shares  of 
Reading  first  preferred. 

It  has  been  said  that  there  is  a  class  of  brokers  who, 
while  acting  as  agents  for  customers,  also  speculate  on  their 
own  account,  and  that  others  prohibit  all  speculations  by 
partners  and  clerks  and  confine  themselves  strictly  to  a  com- 
mission basis.  It  would  be  of  interest  to  know  exactly  how 
many  members  of  the  Exchange  really  resist  the  temptation 
to  speculate  on  their  own  account,  but  of  course  it  is  im- 
possible to  find  out.  In  a  market  report  in  a  newspaper  of 
1835  the  writer  says :  "  One  of  the  evil  practises  of  the 
brokers  is  that  of  privately  dealing  in  stocks  as  principals 
while  they  pass  generally  for  mere  agents  in  the  Street. 
This  practise  is  not  permitted  in  the  London  Stock  Ex- 
change. Wood  &  Bogart  stick  to  the  legitimate  business 
of  executing  the  orders  of  their  customers  without  speculat- 
ing privately  on  their  own  account."  The  same  writer  in- 
timates that  some  of  the  brokers  then  did  what  would  now 
be  called  "bucket-shopping"  their  orders — that  is  to  say, 
not  actually  executing  them,  but  paying  or  receiving  the 
differences  in  prices  after  a  customer  has  closed  his  account. 
This  is  gambling  pure  and  simple,  an  illegitimate  practise 
carried  on  extensively  by  persons  outside  of  the  Exchange, 
but  sternly  prohibited  to  members,  and  it  is  in  many  States 
prohibited  by  law.  Operators  who  wish  to  make  certain 
that  brokers  are  not  bucket-shopping  their  orders  can  de- 
mand, as  they  have  the  right  to  do,  to  be  supplied  with  the 
name  of  the  broker  on  the  other  side  of  every  transaction. 
In  order  to  avoid  the  appearance  as  well  as  the  reality  of 
bucket-shopping  orders,  the  Governing  Committee  of  the 
Exchange  has  made  a  rule  that  where  brokers  have  orders 
to  buy  and  orders  to  sell  the  same  security,  they  must  offer 
the  security  at  one-eighth  per  cent  higher  than  their  bids 
before  making  transactions  with  themselves. 


THE   BROKER  AND   HIS  OFFICE  169 

The  stock-broker  usually  arrives  at  bis  office  before  the 
opening  of  the  Exchange,  in  time  to  consult  the  London 
prices,  confer  with  his  partners  as  to  the  day's  policy,  and 
perhaps  wire  a  despatch  of  information  and  advice  to  branch 
offices.  His  day's  routine  then  depends  on  whether  he  re- 
mains in  the  office  or  represents  the  firm  on  the  floor  of  the 
Exchange.  In  either  case  he  is  fully  occupied  until  after 
three  o'clock,  for  besides  executing  orders  for  his  customers 
he  has  to  arrange  for  carrying  the  securities  by  loans  at 
the  bank,  and  look  after  the  many  details  of  a  complicated 
business.  After  the  close  of  the  Exchange  many  brokers 
write,  or  have  written  for  them,  what  are  called  "  market 
letters,"  which  are  more  or  less  elaborate  reviews  of  the 
market  with  opinions  as  to  the  future  of  prices.  These  are 
manifolded  or  printed  and  mailed  to  customers.  By  four 
o'clock,  and  perhaps  earlier,  the  broker  is  able  to  leave  the 
street  for  his  home  or  club.  His  hours  are  short,  but  ex- 
ceedingly busy.  His  clerks  follow  him  as  soon  as  their 
daily  tasks  are  finished,  and  by  six  o'clock  the  financial  dis- 
trict is  deserted  by  all  save  the  janitors  and  their  families. 
Silence  reigns  in  the  streets  recently  so  thronged  and  busy, 
and  the  only  sounds  heard  are  of  girls  jumping  their  ropes 
and  boys  playing  ball.  But  in  times  of  stress  and  trouble 
the  brokers'  offices  may  be  kept  open  until  midnight,  while 
clerks  pore  over  the  books  and  anxious  partners  arrange 
their  affairs  for  the  next  day. 


CHAPTER    XIV 

THE    INVESTMENT    BUSINESS 

IT  was  said  by  the  late  John  Jacob  Astor  that  he  could 
hire  plenty  of  men  competent  to  collect  the  money  due  him 
from  rents  and  other  sources  of  income,  but  that  it  took 
all  of  his  own  time  to  see  that  his  surplus  income  was  well 
invested.  The  safe  investment  of  money,  by  which  is 
meant  the  purchase  of  securities  or  real  estate  for  perma- 
nent holding,  as  a  source  of  yearly  revenue,  requires  time, 
close  study,  and  sound  judgment.  Mr.  Astor  thought  that 
he  could  depend  only  upon  himself  to  do  this  work.  That  so 
many  mistakes  are  made  in  investing  money  may  be  said, 
however,  to  be  due  either  to  too  much  dependence  upon 
oneself  or  too  much  dependence  upon  others.  A  golden 
mean  is  best.  Not  every  one  can  be  an  Astor. 

As  the  country  grows  richer  and  has  a  larger  surplus 
every  year  over  and  above  the  expenditures  for  living 
expenses,  the  more  difficult  becomes  the  task  of  investment, 
because  the  supply  of  safe  investments  may  not  keep  pace 
with  the  expansion  of  surplus  wealth.  Then  it  is  that 
investors  take  large  risks  buying  securities  of  the  second 
or  third  class.  There  soon  comes  a  point  where  investment 
itself  becomes  a  mere  speculation,  when  the  purchase  of 
doubtful  securities  outright  becomes  more  perilous  than 
would  the  buying  of  high-class  dividend-paying  stocks  on 
margin. 

Private  capitalists,  estates,  insurance  companies,  and 
other  corporations  are  constantly  in  the  market  seeking 
170 


THE  INVESTMENT   BUSINESS  171 

investments,  and  while,  as  compared  with  the  speculative 
dealings,  the  investment  business  seems  small,  it  is  in  reality 
very  large ;  and  there  exists  in  Wall  Street  elaborate 
machinery  for  investments.  There  are  the  great  banking- 
houses  which  are  constantly  bringing  out  the  new  securities 
issued  by  the  railroads  and  other  corporations.  There  are 
banking-houses  which  make  a  specialty  of  the  United  States 
bonds.  These  or  other  firms  also  bid  for  new  issues  of 
State,  county,  and  city  bonds,  which,  if  they  secure  the 
awards,  they  later  sell  over  their  counters  to  investors. 
Many  brokers  in  and  out  of  the  Exchange  confine  them- 
selves exclusively  to  investment  securities  ;  they  take  no 
margin  accounts  whatever.  There  are  brokers  who  make 
a  specialty  of  different  classes  of  investment,  so  that  there 
exists  in  the  Street  every  facility  for  the  sale  or  purchase 
of  high-class  securities. 

Here  also  comes  every  doubtful  new  scheme  and  enter- 
prise seeking  money  for  its  promotion  and  offering  stocks 
and  bonds  galore  to  investors.  The  promoter  flourishes  in 
the  Street  in  every  form.  Standard  investment  securities 
are  subject  to  fewer  fluctuations  in  prices  than  speculative 
stocks  ;  they  are  less  liable  to  manipulation.  Permanent 
elements  of  value  more  than  transient  conditions  of  the 
market  govern  their  price. 

The  Wall  Street  man  studies  an  investment  from  three 
standpoints : 

1.  Its  yield  in  interest  or  dividend. 

2.  Its  security. 

3.  Its  duration. 

A  bond  to  command  the  highest  price  must  pay  a  fail- 
rate  of  interest,  be  of  undoubted  security,  and  have  a  long 
period  to  run.  It  may  pay  <">  per  cent  a  year  and  yet  be 
of  doubtful  safety  or  of  inferior  standing,  like  a  third 
mortgage  or  income  bond.  Or  it  may  pay  0  per  cent  and 
be  a  first-class  mortgage  on  a  property  of  known  value, 
and  yet  have  only  two  or  three  years  to  run.  In  either  of 


172  THE  WORK  OF  WALL  STREET 

these  cases  its  value  as  an  investment  would  be  much 
impaired,  and  a  3-  or  3^-per-cent  bond  issued  by  a  leading 
corporation  on  undoubted  security,  and  having  a  long 
period  of  years  to  run,  might  command  a  higher  price. 

A  generation  ago  even  a  high-class  security  had  to  pay 
as  much  as  7  per  cent  a  year  in  order  to  command  a 
sale,  but  now  American  interest  rates  have  declined  to  the 
level  of  those  of  Europe.  In  1865  the  Government  paid 
over  7  per  cent  interest  on  $671,000,000  of  its  debt,  6  per 
cent  on  $1,213,000,000,  5  per  cent  on  $245,000,000,  and 
4  per  cent  on  only  $90,000,000.  To-day  one-half  of  the 
outstanding  bonds  of  the  United  States  pay  only  2  per  cent 
interest. 

It  is  a  rule  that  the  more  secure  an  investment  the  lower 
its  rate  of  interest.  If  an  absolutely  safe  investment  pays 
a  high  rate  of  interest  or  dividend,  it  commands  a  premium 
which  reduces  the  actual  return  on  the  investment  to  a  level 
with  the  prevailing  rates  for  securities  of  that  class. 

The  premium  is  the  price  paid  for  a  security  over  and 
above  its  par  value.  Thus,  a  United  States  4-per-cent  bond 
due  1925,  selling  at  140,  pays  4  per  cent  on  its  par  value  of 
100  ;  at  140  it  would  yield  to  its  holder  2.86  per  cent.  The 
calculation  of  bond  values  involves  an  intricate  mathematical 
problem,  which,  however,  can  be  avoided  by  the  use  of  tables 
prepared  by  actuaries. 

The  bond  houses  become  expert  not  only  in  estimating 
what  is  the  theoretical  value  of  a  security  as  determined  by 
its  safety,  its  interest,  and  its  duration,  but  also  as  to  its 
probable  market  price,  as  governed  by  the  supply  of  invest- 
ment money  and  other  conditions.  These  houses  are  promi- 
nent as  bidders  for  State  and  city  bonds.  They  will  some- 
times bid  for  an  entire  issue  at  a  certain  premium,  and  retail 
the  same  to  investors  at  a  higher  price.  All  this  requires 
close  calculation  and  a  sound  judgment. 

Instead  of  7  per  cent  being  the  standard  rate  of  interest 
on  a  safe  investment,  as  it  was  a  generation  ago,  3  per  cent 


THE  INVESTMENT  BUSINESS  173 

may  now  be  said  to  be  more  nearly  the  earning  power  of 
money  when  invested  in  a  sound  security.  Indeed,  the 
Gold  Standard  Law  of  1900  provided  for  the  purchase  by 
the  Government  of  its  outstanding  bonds  on  a  2^-per-cent 
investment  basis,  2-per-cent  bonds  being  issued  in  their 
place.  The  prevailing  price  of  railroad  bonds  bears  4  per 
cent  interest,  and  if  of  undoubted  standing  they  command 
a  premium.  Of  all  the  bonds  listed  on  the  Stock  Exchange 
at  the  present  time,  38  bear  7  per  cent  interest,  and  of  these 
only  1  runs  for  as  long  a  period  as  until  1936.  Another 
runs  until  1927.  All  the  rest  will  mature  before  1920,  and 
11  on  or>  before  1908.  Many  of  these  may  be  retired  earlier 
by  refunding  operations.  The  7-per-cent  bond  is  therefore 
fast  passing  out  of  existence.  It  will  soon  be  followed  by 
the  6-per-cent  bond.  Of  these  there  are  112  listed,  of  which 
84  will  mature  on  or  before  1925,  and  most  of  them  will 
probably  be  retired  earlier  through  refunding  operations. 
Of  582  railroad  and  industrial  bonds  listed  on  the  Exchange, 
178  yielded  less  than  4  per  cent  a  year  at  the  premium  at 
which  they  were  quoted  in  November,  1901.  One  yielded 
less  than  3  per  cent.  Only  47  yielded  more  than  5  per 
cent.  Three  hundred  and  fifty-seven  yielded  between  4 
and  5  per  cent.  The  bond  list  at  that  time,  therefore,  was 
upon  an  average  4-per-cent  basis. 

An  examination  of  the  Interstate  Commerce  report 
shows  that  in  1900  more  than  one-half  of  the  stocks  paid 
no  dividends  whatever,  and  that  the  average  rate  of  the  rest 

'  O 

was  5.23  per  cent.  In  a  statement  issued  recently  by  the 
Merchants'  Association  it  was  said  that  the  average  rate  of 
interest  on  mortgage  securities  is  4-|  to  5  per  cent.  The 
average  rate  of  the  principal  life-insurance  companies  is  4 
per  cent,  and  they  lend  at  5  per  cent  on  the  security  of 
policies. 


CHAPTER  XV 

THE    MONEY   MAEKET 

ADDRESSING  an  assemblage  of  bankers,  early  in  1902, 
Lyman  J.  Gage,  then  Secretary  of  the  Treasury,  said  that 
the  nomenclature  of  the  Street  ought  to  be  changed ;  and 
that  instead  of  speaking  of  rates  for  money,  we  should  use 
the  term  "  rates  for  credit."  It  has  already  been  shown  that 
what  is  called  the  stock-market  is  really  an  income  market. 
In  like  manner  what  is  called  the  money  market  is  in  reality 
a  credit  market.  As  Mr.  Gage  shows,  when  rates  for 
money  are  high,  people  become  alarmed  about  the  scarcity 
of  money  as  indicated  by  these  high  rates,  when  substan- 
tially there  has  been  no  change  in  the  volume  of  money, 
either  in  the  hands  of  the  people  or  in  any  under  control  of 
the  banks.  What  ought  to  be  quoted  is  not  money,  but 
credit.  It  is  credit  that  is  getting  difficult,  not  actual  money 
that  is  becoming  scarce.  Macleod,  the  English  economist, 
also  defines  the  money  market  as  a  credit  market,  and 
speaks  of  a  bank  as  "  a  manufactory  of  credits." 

AVall  Street  is  not  exceptional  in  carrying  on  the  vast 
bulk  of  its  operations  on  credit.  More  than  90  per  cent  of 
the  business  of  the  country,  and  indeed  of  the  world,  is  con- 
ducted in  the  same  way.  The  merchant,  as  well  as  the 
broker,  goes  to  the  bank  for  credit.  "  Commerce,"  said 
Daniel  "Webster,  "can  not  exist  without  credit.  Credit  is 
the  vital  air  of  the  system.  It  has  done  more,  a  thousand 
times,  to  enrich  nations  than  all  the  mines  of  the  world." 
Credit  makes  one  dollar  do  the  work  of  many  dollars.  Some 
174 


THE  MONEY  MARKET  175 

of  the  old  prejudice  against  money-lenders  still  exists,  and 
in  certain  sections  of  our  country  bankers  are  even  now 
held  in  distrust  and  fear.  It  is  the  distrust  and  fear  of 
ignorance. 

It  has  been  said  that  the  man  who  makes  two  blades  of 
grass  grow  where  one  grew  before  is  a  benefactor  of  his 
kind.  Then  certainly  a  man  who  can,  by  the  credit  system, 
multiply  the  usefulness  of  a  dollar  is  equally  a  public  bene- 
factor. Money  inert,  unused,  is  of  no  benefit.  It  is  only 
when  put  in  use  that  money  becomes  of  value.  In  storage 
it  is  a  burden  ;  in  action  a  beneficence.  It  is  never  more  in 
action  than  when  made  the  basis  for  credit.  It  is  for  this 
reason  that  a  large  surplus  held  by  the  Treasury  becomes 
an  evil.  The  Government,  least  of  all,  can  afford  to  be  a 
hoarder  of  money.  Thus  the  many  propositions  that  have 
recently  been  made  for  the  purpose  of  remedying  this 
defect  in  our  financial  system.  Some  substitute  for  the 
Subtreasury  is  demanded.  Economists  in  fact  hold  that 
money  itself  is  only  a  high  form  of  credit,  a  bill  of  ex- 
change to  facilitate  commerce,  though  we  employ  as  the 
basis  of  all  money,  gold,  a  product  of  stable  and  constant 
value  that  is  a  part  of  the  general  wealth.  The  hoarding 
of  money  is,  therefore,  a  contraction  of  credit  and  a  blow  to 
business  activities  and  national  prosperity. 

The  extent  to  which  the  banks  multiply  the  power  of 
money  through  their  system  of  credit  is  shown  in  a  striking 
manner  by  statistics  gathered  from  the  report  of  the  Con- 
troller of  the  Currency.  The  aggregate  banking  resources 
of  the  United  States  in  June,  1901,  amounted  to  $12,329,- 
560,000,  while  at  the  same  time  the  entire  amount  of  coin 
and  paper  money  was  $2,483,000,000.  In  other  words,  the 
credit  system  expands  nearly  six  times  the  power  of  every 
dollar.  On  the  8th  of  February,  19<»2,  the  banks  of  Xew 
York  held  deposits  of  more  than  81,000,000,000,  while  the 
amount  of  actual  coin  and  legal  tenders  held  was  a  little 

more  than  one-fourth  of  that  amount.     In  Great  Britain, 
13 


176  THE   WORK   OF   WALL  STREET 

the  proportion  of  credits  to  cash  reserve  is  even  greater 
than  in  this  country,  and  as  credit  is  one  of  the  principal 
elements  of  wealth,  this  fact  explains,  in  part,  England's 
immense  financial  power. 

The  capitalist  is  a  man  who  uses  his  own  money  and 
credit  in  the  transaction  of  business.  A  banker  uses  his 
own  money  and  credit  as  well  as  the  money  and  credit  of 
others  intrusted  to  him  in  the  transaction  of  business.  On 
the  one  hand,  there  are  individuals  who  possess  money,  but 
have  no  immediate  business  or  investment  in  which  to 
employ  it;  so  they  deposit  it  in  banks  for  convenience, 
safe-keeping,  and  in  some  instances  to  draw  interest  upon 
it.  Other  individuals  are  in  business  and  need  money  or 
credit  to  carry  it  on  ;  these  go  to  the  banks  and  borrow  it 
at  the  prevailing  rate  of  interest.  As  the  broker  is  an 
agent  between  buyers  and  sellers,  so  the  banker  is  an  agent 
between  borrowers  and  lenders.  In  the  complexity  of  his 
affairs  the  modern  business  man,  however,  may  become  at 
the  same  time  both  a  borrower  and  a  lender.  lie  is  con- 
stantly depositing  credits  in  the  bank,  and  at  the  same  time 
is  drawing  them  out  in  the  shape  of  loans. 

Lending  of  money  or  extending  of  credits,  as  a  business, 
is  carried  on  by  individuals  who  are  known  as  private  bank- 
ers and  by  corporations  called  banks,  a  name  so  old  that 
there  is  a  dispute  as  to  its  origin.  The  first  banks  served 
only  the  purpose  of  providing  money  for  Government  uses. 
Then  they  became  depositories  for  safe-keeping  of  money, 
and  vehicles  for  its  transfer  from  one  locality  to  another. 
Gradually  they  have  assumed  other  functions  of  banking, 
such  as  the  issuing,  lending,  and  borrowing  of  money. 

There  are  various  kinds  of  banks.  Savings-banks  re- 
ceive deposits  on  which  they  pay  interest,  and  loan  money 
on  real  estate  or  invest  in  United  States  bonds  and  other  safe 
securities  under  restrictions  prescribed  by  law.  They  are 
created  primarily  for  the  philanthropic  purpose  of  taking 
the  small  savings  of  working  people  and  investing  them  in 


THE  MONEY  MARKET  177 

a  way  that  will  be  safe  and  profitable.  There  is  only  one 
savings-bank  in  Wall  Street,  and  as  a  class  these  institu- 
tions have  very  little  connection  with  the  Street,  except 
that  formerly,  as  large  holders  of  United  States  bonds,  they 
were  an  important  factor  in  the  market  for  those  securities. 
They  have,  however,  exchanged  most  of  these  bonds  for 
other  investments,  and  have  thus  become  a  factor  in  the 
investment  market. 

Commercial  banks  are  institutions  both  of  deposit  and 
discount ;  that  is  to  say,  they  receive  deposits  subject  to 
withdrawal  by  check  and  lend  on  securities  or  negotiable 
paper.  National  and  State  banks  are  of  this  class.  But 
the  National  banks  are  also  banks  of  issue  or  circulation. 
They  have  the  right  under  certain  restrictions  to  issue 
notes  which  circulate  the  same  as  Government  money. 
These  are  secured  by  United  States  bonds  deposited  with 
the  Treasury  Department.  State  banks  do  not  issue  notes, 
as  there  is  a  prohibitory  tax  of  10  per  cent  upon  State  bank 
circulation. 

Trust  companies  receive  and  loan  money  like  commer- 
cial banks,  and  can  also  loan  on  real  property.  Moreover, 
they  accept  and  execute  trusts,  acting  as  trustees  for  estates 
and  corporations.  They  are  supposed,  however,  not  to  do  a 
general  banking  business  or  to  allow  clients  to  draw  on  their 
deposits  by  check.  Some  of  the  larger  companies  still  limit 
their  business  strictly  to  the  original  trust  plan,  but  most  of 
them  have  broadened  out  so  as  to  do  business  the  same  as 
National  and  State  banks,  and  also  to  underwrite  securities 
like  private  bankers.  They  cannot,  however,  issue  notes. 

The  private  bankers  do  business  much  the  same  as  incor- 
porated banks.  They  receive  and  loan  money.  They  act 
as  financial  agents  for  domestic  corporations  and  foreign 
banking-houses.  They  underwrite  new  issues  of  securi- 
ties. They  issue  letters  of  credit.  They  deal  in  foreign 
exchange,  and  most  of  them  export  and  import  gold  when 
the  occasion  requires. 


178  THE  WORK  OF   WALL   STREET 

Of  these  various  classes  of  money-lenders  the  most  im- 
portant are  the  National  banks,  which  have  become  the 
reserve  banks  of  the  country.  A  statement  by  the  Con- 
troller of  the  Currency  shows  that  on  December  10,  1901, 
the  National  banks  in  New  York  held  as  deposits  of  other 
banks  and  trust  companies  $342,224,500,  the  amount  due  to 
other  depositors  being  $498, 547, TOO.  The  National  banks 
are  also  depositories  for  a  heavy  amount  of  the  Treasury 
surplus.  Practically  the  cash  reserves  of  the  National  banks 
form  the  basis  on  which  rests  the  vast  output  of  all  credit. 

The  National  banking  law  creates  what  are  known  as 
Central  Reserve  and  Reserve  Cities,  New  York  being  the 
most  important  of  these.  The  National  banks  there  are 
obliged  to  maintain  at  all  times  a  reserve  in  specie  and  legal 
tenders  equal  to  25  per  cent  of  the  total  deposits.  But  they 
are  permitted  to  receive  as  deposits,  on  which  interest  is 
paid,  one-half  of  the  legal  reserves  which  National  banks  in 
other  parts  of  the  country  are  required  to  keep.  These 
country  banks,  therefore,  have  the  advantage  of  earning  in- 
terest on  one-half  of  their  reserves,  while  the  New  York 
banks  have -the  advantage  of  the  power  which  comes  to 
them  as  the  holders  of  the  deposits  of  country  banks. 

AVhen  it  is  said  that  the  banking  power  of  the  world,  in 
1901,  was  estimated  at  $25,000,000,000,  of  which  $11,000,- 
000,000  were  in  the  United  States,  and  that  the  loans  and 
discounts  of  the  National  banks  in  New  York  amount  to 
one-fifth  of  the  ao-o-re^ate  accommodations  made  by  all  the 

cjO        o  «/ 

National  banks  of  the  country,  some  conception  may  be 
had  of  the  concentration  of  money  and  credit  in  this  center. 
Money  has  a  magnetic  power,  and  the  needle  of  the  financial 
compass  steadily  points  toward  New  York.  But  while  it 
has  this  power,  it  also  has  the  responsibilities  which  attach 
to  power ;  and  when  any  section  of  the  country  is  in 
financial  need,  by  reason  of  harvested  crops  that  must  be 
moved  to  markets,  or  by  any  other  cause,  it  is  New  York 
that  must  furnish  most  of  the  relief. 


THE  MONEY  MARKET  179 

One  of  the  latest  developments  in  the  financing  of  Na- 
tional banks  is  in  the  line  of  investments.  Two  or  three  of 
the  large  banks  in  New  York  have  become  heavy  holders  of 
securities,  and  thus  important  factors  in  the  market  for  the 
buying  and  selling  of  securities,  especially  bonds.  These 
securities  are  carried  on  the  books  of  the  banks  as  loans, 
and  this  fact  is  partly  responsible  for  the  remarkable  expan- 
sion in  the  aggregate  of  loans  to  nearly  $1,000,000,000. 

Sixty  of  the  National  and  State  banks  of  New  York  are 
members  of  the  Bank  Clearing-House,  and  seventy-nine 
other  banks  and  trust  companies  of  the  city,  and  of  Ho- 
boken  and  Jersey  City,  clear  through  the  member  banks. 
The  Subtreasury  is  also  a  member  of  the  Clearing-House 
and  makes  its  daily  exchanges  there.  This  institution,  es- 
tablished in  1853,  and  whose  building  in  Cedar  Street  is 
one  of  the  architectural  ornaments  of  the  city,  has  recently 
been  fully  described  by  James  G.  Cannon  in  his  book  on 
Clearing-Houses.  It  performs  the  same  office  for  the  banks 
that  the  Stock  Clearing-House  does  for  the  stock-brokers. 
During  the  fiscal  year  ending  September  30,  1001,  the  ex- 
changes of  the  Clearing-House  banks  amounted  to  $77,- 
020,1)72,493.  It  is  obvious  that  if  this  stupendous  sum 
represented  actual  deliveries  in  payment  of  checks  and 
drafts,  if  each  bank  had  to  send  to  every  other  bank  to 
make  collections,  and  its  messengers  obliged  to  carry  back 
the  money  due  their  bank,  in  specie  or  legal  tenders,  the 
business  of  New  York  would  be  so  congested  as  to  produce 
a  blockade  or  paralysis.  But  by  meeting  in  the  Clearing- 
House  and  there  ascertaining  what  each  institution  owes 
the  others,  and  by  a  simple  and  ingenious  method  of  clear- 
ances, establishing  balances  which  are  settled  by  cash  pay- 
ments, the  immense  business  of  the  banks  is  conducted  as 
easily  and  safely  as  if,  instead  of  one  hundred  and  thirty- 
nine  banks,  there  was  only  one,  and  all  transactions  passed 
through  its  doors.  It  takes  less  than  an  hour  to  clear  a 
day's  exchanges.  The  $77,000,000,000  of  exchanges  in  19<>1 


180  THE  WORK  OP  WALL  STEEET 

were  settled  by  payments  of  cash  balances  aggregating  only 
$3,515,037,741.  In  other  words,  the  Clearing-House  elim- 
inated nearly  $74,000,000,000  that  would  have  had  to  be 
paid  in  actual  delivery  and  individual  settlement  of  every 
item.  The  percentage  of  balances  to  clearances  was  only 
4.57.  In  one  year  it  was  under  3,  and  the  average  percent- 
age since  1854  is  only  4.77.  The  exchanges  of  May  10, 

1901,  amounting  to  $598,537,409,  were  settled  by  payments 
of  balances  amounting  to  $23,873,115.     In  one  day  in  May, 

1902,  the  Chatham  Bank  settled  its  exchanges,  amounting 
to  $1,323,694,  by  receiving  a  balance  of  ten  cents. 

But  the  Clearing- House  has  more  important  functions 
than  even  that  of  providing  the  machinery  for  clearances. 
It  extends  loans  to  the  Government  in  times  of  National 
distress,  as  during  the  civil  war.  It  assists  solvent  banks 
temporarily  embarrassed  and  saves  them  from  suspension. 
In  times  of  imminent  panic,  it  issues  Clearing-House  loan- 
certificates,  and  thus  prevents  what  might  result  in  a  con- 
dition of  general  banking  and  commercial  insolvency.  The 
loan-certiricates  thus  issued  in  times  of  dire  emergencies 
are  in  the  nature  of  "temporary  loans  made  by  the  banks 
associated  together  as  a  Clearing-House  Association  to  the 
members  thereof,  for  the  purpose  of  settling  Clearing- 
House  balances."  They  are  a  species  of  fiat  money,  cir- 
culating only  at  the  Clearing-House,  and  retired  as  soon  as 
the  danger  of  panic  is  over.  The  Clearing-lion se  estab- 
lishes rates  of  charges  for  collections  of  out-of-town  checks. 
It  has  also  been  more  than  once  proposed  that  it  should 
add  another  and  still  more  important  function,  that  of 
fixing  a  daily  rate  for  call  loans.  A  committee  of  bankers, 
it  has  been  suggested,  should  be  appointed  to  meet  every 
day  and  determine  what  the  rate  of  call  loans  should  be 
for  that  day,  and  this  rate  would  be  binding  on  all  the 
member  banks  and  the  institutions  that  cleared  through 
them.  The  membership  of  this  committee  under  such 
a  system  would  be  changed  frequently,  say  once  every 


THE  MONEY  MARKET  181 

month.  The  system  would  give  the  Clearing-llouse  much 
of  the  power  now  exercised  by  the  Bank  of  England, 
which,  by  its  rate  of  discount,  safeguards  the  English 
money  market  and  prevents  many  monetary  panics.  It 
has  also  been  suggested  that  the  Clearing-House  should  fix 
a  common  rate  of  interest  to  be  paid  by  the  New  York 
banks  on  the  deposits  of  country  banks.  Neither  proposi- 
tion has,  however,  been  adopted,  possibly  through  fear  that 
the  act  would  be  interpreted  as  an  attempt  to  create  a 
monopoly  in  money.  The  Clearing-House,  the  banks,  and 
the  trust  companies  constitute  what  may  be  termed  the 
plant  of  the  money  market.  The  bank  officials,  the  private 
bankers,  and  the  money  and  exchange  brokers  are  the 
skilled  workmen  who  operate  this  plant.  These  brokers 
are  men  who  make  a  business  of  buying  and  selling  mercan- 
tile paper  or  bills  of  exchange,  while  others  loan  the  money 
of  the  banks  to  members  of  the  Stock  Exchange. 

This  brings  us  naturally  to  the  point  of  contact  between 
the  money  market  and  the  stock-market.  It  has  been  seen 
that  while  the  stock-broker  executes  orders  for  his  customer 
on  10  per  cent  margin,  he  is  obliged  to  pay  for  the  securi- 
ties in  full  upon  delivery.  It  would  be  manifestly  impossi- 
ble for  any  broker  to  do  this  without  borrowing  money 
from  the  banks.  He  has  extended  credit  to  his  customer ; 
he  must  himself  get  credit  from  the  banks.  For  instance, 
a  broker  buys  5,000  shares  of  New  York  Central  at  162, 
amounting  to  $810,000.  But  he  executes  this  order  for  his 
customer  on  a  margin  of  $81,000,  so  that  he  must  pay  the 
difference,  8729,000,  either  out  of  his  own  capital  or  else 
borrow  of  the  banks.  Necessity  compels  him  to  go  to  the 
banks.  He  takes  the  5,000  shares  of  the  New  York  Cen- 
tral to  the  banks  and  offers  them  as  collateral  for  a  loan. 
If  he  is  wise,  he  already  has  an  agreement  with  his  cus- 
tomers enablino-  him  to  do  this.  The  banks  lend  him 

O 

8648,000  on  the  collateral  at  the  prevailing  rate  of  interest. 
"With  the  881,000  received  from  his  customer  and  $648,000 


182  THE  WORK  OP   WALL  STREET 

dollars  from  the  banks,  the  broker  has  $729,000,  or  $81,000 
less  than  he  must  pay  for  the  stock.  This  he  must  supply 
out  of  his  own  capital. 

What  is  the  net  result  ?  The  customer  is  nominally  the 
owner  of  5,000  shares  of  stock,  which  he  has,  however, 
never  seen,  and  which  is  actually  in  possession  of  banks 
whose  very  names  he  may  not  know.  The  interest  of  the 
banks  in  the  stock  represents  80  per  cent  of  its  value ;  the 
broker's,  10  per  cent ;  and  the  customer's,  10  per  cent.  It 
does  not  follow  that  every  transaction  is  exactly  of  these 
proportions  of  risk.  The  broker,  in  fact,  may  be  able  to 
obtain  from  the  banks  loans  large  enough  to  enable  him,  in 
connection  with  his  customer's  margin,  to  carry  a  transac- 
tion without  the  employment  of  much,  if  any,  of  his  own 
capital.  This  example  has  been  based  upon  the  general 
rule,  that  the  margin  demanded  by  the  broker  of  his  cus- 
tomer is  usually  10  per  cent,  and  the  margin  demanded  by 
the  banks  of  the  broker  is  usually  20  per  cent,  the  per- 
centages in  both  cases  varying  in  accordance  with  the 
character  of  the  securities.  The  example  serves  to  illus- 
trate clearly  the  close  intimacy  existing  between  the  money 
market  and  the  stock-market.  The  money-lenders  are,  in 
fact,  the  actual  holders  of  the  securities  dealt  in,  and  they 
have  the  largest  interest  at  stake  in  the  maintenance  of 
values. 

But  this  is  not  the  only  connection  between  the  banks 
and  the  stock-brokers.  Let  us  return  to  the  example  already 
given.  The  broker  has  bought  stock  for  which,  on  delivery, 
he  must  pay  $810,000.  Now,  before  he  can  get  any  loans 
from  the  banks  on  this  stock  he  must  have  the  stock  in  his 
possession,  so  as  to  be  able  to  use  it  as  collateral  for  the 
loans.  Before  he  can  get  it  in  his  possession  he  must  pay 
for  it.  His  balance  in  the  bank  may  not  be  more  than 
$50,000.  What  is  he  to  do  ? 

Right  here  enters  the  new  alliance  between  the  banks 
and  the  brokers.  It  goes  by  the  name  of  certification.  The 


THE  MONEY  MARKET  183 

broker,  in  the  case  instanced,  draws  a  check  for  $810,000  in 
payment  for  the  stock.  The  check  is  sent  to  the  bank 
where  the  broker  keeps  his  account  for  certification.  The 
cashier  or  paying  teller  indorses  the  check  across  its  face, 
thus  certifying  not  only  that  the  signature  is  correct, 
but  that  the  bank  will  pay  the  amount  of  the  check  on 
presentation  and  identification,  or  when  it  comes  to  it 
through  the  operations  of  the  Clearing-House.  But  it  has 
been  said  that  the  broker  has  a  balance  of  only  $50,000, 
and  here  the  bank  is  certifying  to  his  check  for  $810,000. 
That  is  what  is  called  "  overcertification,"  and  it  is  another 
form  of  a  great  system  of  credits  on  which  the  transactions 
of  Wall  Street  stand. 

Overcertification  is  in  effect  a  temporary  loan.  There 
are  a  number  of  AY  all  Street  banks — not  all — that  do  a 
regular  business  of  certifying  brokers'  checks,  but  a  large 
proportion  of  this  business  is  done  by  trust  companies.  A 
broker  enters  into  a  definite  arrangement  with  one  of  the 
banks  on  a  basis  something  like  this :  the  broker  agrees  to 
keep  a  daily  cash  balance  at  the  bank  of,  say,  $50,000 ;  in 
return,  the  bank  agrees  to  certify  his  checks  to  an  amount, 
say,  of  $1,000,000. 

This  on  its  face  seems  startling,  especially  as  the  National 
banking  law  provides  that  it  shall  be  unlawful  for  any 
officer,  clerk,  or  agent  of  any  Xational  Banking  Association 
to  certify  any  check  drawn  upon  the  association,  unless  the 
person  or  company  drawing  the  check  has  on  deposit  with 
the  association,  at  the  time  such  check  is  certified,  an 
amount  of  money  equal  to  the  amount  specified  in  such 
check. 

But  practically  this  law  is  a  dead  letter.  ^Moreover,  the 
practise  of  overcertification  as  conducted  for  the  benefit  of 
stock-brokers  is  by  no  means  as  dangerous  as  it  seems.  The 
immediate  cause  of  the  Seventh  Xational  Bank  failure  in 
1001  was,  indeed,  an  overcertification,  but  the  real  causes 
were  deeper  seated  than  that.  There  has  been  no  other 


184  THE  WORK  OF  WALL  STREET 

serious  trouble  caused  by  certifications  for  brokers  in  twenty 
years. 

The  banking  institutions  are  very  conservative  and  care- 
ful in  transactions  of  this  kind.  They  must  know  all  about 
the  broker,  his  character,  good  judgment,  and  business 
methods  and  standing.  In  other  words,  personal  character 
is  a  valuable  asset  in  Wall  Street.  A  man's  credit  in  the 
Exchange  and  in  the  banks  depends  largely  upon  it.  Then 
the  bank  stipulates,  in  entering  upon  an  agreement  of  this 
kind  with  the  broker,  that,  while  it  will  certify,  say,  to  an 
amount  of  $1,000,000  on  a  net  daily  balance  of  $50,000, 
the  broker  must  not  frequently  reach  that  limit.  Moreover, 
he  must  make  his  deposits  at  the  bank  as  frequently  as  he 
receives  checks  for  payment  for  securities  delivered.  He 
can  not  wait  until  nearly  three  o'clock  and  then  make  one 
deposit  for  the  day,  but  must  deposit,  it  may  be,  six  or 
seven  times  a  day.  The  result  is,  that  while  the  broker  is 
receiving  the  benefit  of  large  certifications  in  excess  of  his 
balance,  at  the  same  time  he  is  at  frequent  intervals  deposit- 
ing other  certified  checks.  Deposits  and  certifications  thus 
go  on  simultaneously.  The  violation  of  the  National  bank 
law  against  overcertification  is  in  most  cases  more  technical 
than  actual.  Of  course,  as  soon  as  the  broker  gets  his  stock 
and  arranges  his  loan  he  is  able  to  make  every  check  good, 
and  by  his  arrangement  with  the  bank  he  is  bound  to  main- 
tain his  average  daily  balance  of  $50,000,  or  whatever  other 
amount  may  be  agreed  upon  The  larger  the  average  bal- 
ance the  larger  the  certification. 

It  has  been  said  that  the  practise  of  overcertification  of 
brokers'  checks  is  a  technical  violation  of  the  National 
banking  law.  It  may  be  added  that  the  National  banks 
are  gradually  withdrawing  from  this  business,  and  that  the 
State  banks  and  trust  companies  are  taking  their  place. 
The  National  banks  also  are  beginning  to  adopt  another 
system  which  has  the  merit  of  simplicity  and  freedom  from 
illegality.  They  are  making  morning  loans  to  brokers  of 


THE  MONEY  MARKET  185 

an  amount  that  will  cover  their  probable  certification  for 
the  day.  These  loans  are  based  on  the  "single  named 
paper"  of  the  broker — that  is  to  say,  his  individual,  unin- 
dorsed  note.  With  such  a  loan  the  broker  has  to  his  credit 
a  deposit  at  the  bank  sufficient  for  the  day's  business,  and 
technical  overcertification  is  avoided.  The  practical  result 
is  the  same  under  either  system.  The  latter  has  the  merit 
of  avoiding  the  appearance  of  evil. 

A  broker  who  has  his  checks  certified  has  no  other  claim 
on  his  bank.  A  merchant  depositing  in  a  bank  has  the 
privilege  of  having  his  paper  discounted  to  a  certain  amount 
proportionate  to  his  balance.  Not  so  the  broker.  He  must 
arrange  his  loan  on  a  different  basis. 

The  amount  of  certification  required  in  the  operations 
of  the  stock-market  is  stupendous.  On  the  deliveries  made 
in  the  Stock  Clearing-House  transactions  the  certification 
actually  required  in  1901  was  nearly  $11,000,000,000.  The 
Stock  Clearing-House  clears  about  85  per  cent  of  all  the 
sales  of  stocks.  The  remaining  15  per  cent,  as  well  as  all 
the  transactions  in  bonds,  must  therefore  be  taken  into 
account  in  any  estimate  of  total  certification  required.  The 
bonds  alone  added  at  least  another  billion,  and  it  is  safe  to 
say  that  the  business  of  the  New  York  Stock  Exchange, 
exclusively,  in  1901,  required  a  certification  of  $1-1,000,- 
000,000,  or  an  average  of  about  $45,000,000  a  day.  This 
was  over  one-fifth  the  average  daily  clearances  of  the  Bank 
Clearing-House. 

It  may  be  asked,  What  does  a  bank  make  by  certifying 
brokers'  checks  ?  In  the  example  given,  the  bank  gains  the 
use  of  $50,000,  the  required  daily  balance  of  the  broker. 
But  as  the  National  bank  is,  by  law,  required  to  keep  a 
reserve  of  25  per  cent,  its  net  gain  by  this  operation  is  the 
use  of  $37,500.  Its  profit  is  the  interest  it  earns  by  the 
loaning  of  that  amount.  If  it  was  not  profitable  the  bank 
would  not  engage  in  the  business. 

Loans  to  brokers  on  stock  and  bond  collateral  constitute 


186  THE   WORK  OF  WALL   STREET 

a  large  proportion  of  the  business  of  nearly  every  "Wall 
Street  bank.  This  business  is  carried  on  by  a  bank  in  direct 
contact  with  the  stock-brokers  and  also  through  the  agency 
of  money-brokers  who  act  as  middlemen  between  lenders 
and  borrowers.  The  bulk  of  the  loans  are  made  by  the 
money-brokers,  and  the  rate  for  call-money  is  practically 
established  in  the  Stock  Exchange.  There  is  a  regular 
place  in  the  Board  room  for  effecting  loans,  and  certain 
members  make  this  their  exclusive  business. 

The  banker  comes  to  his  office  in  the  morning  and  ascer- 
tains exactly  how  his  bank  stands  after  going  through  the 
Clearing- House.  If  he  finds  he  has  a  satisfactory  surplus 
above  the  required  legal  reserve,  he  calls  in  one  of  the 
money-brokers  and  tells  him  to  lend  $500,000  or  $1,000,- 
000  or  $5,000,000,  as  the  case  may  be. 

The  brokers  who  act  as  agents  for  the  banks  in  the  lend- 

O 

ing  of  call-money  on  Exchange  actually  perform  this  serv- 
ice gratuitously.  The  broker  is  glad  to  do  the  business, 
as  it  gives  him  a  standing  at  the  banks  and  increases  his 
facilities  for  arranging  time  loans  and  transacting  other 
business  on  which  he  makes  a  profit. 

Besides  the  banks,  the  private  bankers  are  large  lenders 
of  money  to  brokers.  Even  some  mercantile  concerns  lend 
money  on  stock  collateral.  Railroad  and  insurance  com- 
panies arc  at  times  large  lenders.  Russell  Sage  has  for 
many  years  been  a  heavy  lender  on  the  Street,  keeping  a 
considerable  share  of  his  fortune  in  cash,  for  profitable 
employment  in  this  way. 

Rates  of  interest  have  fallen  greatly  in  the  last  quarter  of 
a  century.  Formerly,  brokers,  and  merchants  as  well,  were 
compelled  to  pay  as  much  as  2  per  cent  a  month  for  credit; 
but  as  the  country  has  grown  richer,  rates  have  declined, 
and  call-money  now  only  occasionally  goes  above  0  per  cent/1' 
In  1901  rates  fluctuated  between  H  and  2  per  cent  in  the 

*  It  is  a.  mistaken  idea  that  the  hanks  rejoice  at  a  hiph  rate  of  inter- 
est. As  a  matter  of  fact,  their  profit  is  greater  when  the  rate  is  3  or  4 


12-  7-'  01-500  687 

THE"  THIRTIETH   NATIONAL  BANK 

OF    THE    CITY    OF    NEW    YORK. 


XEW  YORK,  Mar.  16,  1902. 


Mr.  Richard  Jioc. 


DEAR  SIR  : 


Please  send  check 


for  $100,000,  Loan  dated  Mar.  4,  1M~>, 


and  oblige 

Yours  respectfully, 

WILFRED  HOXE, 

Cashier. 

Form  used  in  calling  loan. 

187 


188  THE  WORK  OF  WALL  STREET 

latter  part  of  January,  and  6  and  25  per  cent  in  June  and 
July.  When  call-money  rules  at  1,  2,  or  3  per  cent,  it  is 
said  to  be  easy ;  when  it  rises  to  6,  7,  or  8,  it  is  called  very 
firm ;  and  if  it  goes  to  higher  figures,  it  becomes  stringent. 

Call-loans  are  made  subject  to  repayment  on  demand. 
Practically,  however,  they  are  one-day  loans,  that  is,  subject 
to  call  the  next  day.  A  loan  made  to-day  is  not  called  until 
to-morrow.  When  called,  the  broker  has  until  2.15  p.  M.  to 
pay  back  the  money,  when  he  recovers  the  stock  he  gave  as 
collateral  for  the  loan.  Banks  are  accustomed  to  give 
ample  notice  in  writing  in  some  such  form  as  that  shown 
on  page  187. 

Calls  are  made  in  the  morning,  and  the  broker  has  sev- 
eral hours  in  which  to  make  arrangements  for  repayment. 
It  is  an  unwritten  law  of  the  Street  that  no  loans  are  called 
after  1  p.  M.  It  was  estimated  that  fully  $300,000,000  of 
the  outstanding  loans  of  the  banks  on  February  8th,  amount- 
ing to  $918,000,000,  were  call-loans  on  stock  collateral. 
These  loans  are  made  in  the  simplest  way.  There  is  no 
note  given.  The  broker  hands  in  his  collateral  of  stocks 
and  bonds,  in  an  envelope  on  which  is  written  his  name  and 
the  securities  contained  therein,  and  their  amounts,  as 
shown  in  the  illustration  on  the  opposite  page. 

Everything  above  the  words  "  The  property  of,"  namely, 
the  date,  the  page,  and  the  number,  is  added  by  the  bank 
receiving  the  securities.  There  is  no  evidence  on  this  en- 
velope of  any  loan  whatever.  It  is  simply  a  deposit  of 
securities.  The  loan  envelope  has  been  used  in  the  Street 
for  many  years,  but  this  particular  form  is,  in  large  part, 
the  product  of  conditions  resulting  from  the  imposition  of 
war  taxes  on  securities.  A  strained  construction  of  the 

per  cent  thiiu  when  it  is  25  per  cent.  For  in  the  latter  case,  corporations 
and  large  individual  depositors  will  withdraw  their  money  in  order  to 
make  direct  loans  to  borrowers,  thus  depleting  the  resources  of  the  banks. 
But  when  the  rate  is  3  or  4  per  cent,  they  will  keep  their  money  in  the 
banks,  which  have  then  the  profitable  use  of  it.  Some  banking  institu- 
tions make  it  a  rule  never  to  make  call-loans  at  more  than  6  per  cent. 


THE  MONEY  MARKET 


189 


Stamp  Tax  Law  held 
that  securities  de- 
posited as  collateral 
for  loans  were  sub- 
ject to  taxation,  al- 
though they  had 
been  previously 
taxed  in  their  sale. 
Such  a  construction 
of  the  law,  if  upheld 
by  the  courts,  would 
have  revolutionized 
the  business  of  Wall 
Street. 

The  bank  puts 
the  envelope  of  secu- 
rities received  from 
the  borrower  in  a 
larger  envelope  of 
its  own  like  that  on 
page  190. 

This  shows  that 
the  bank  has  loaned 
to  the  broker,  Rich- 
ard Roe,  $100,000. 
The  envelope  of  se- 
curities enclosed 
therein  contained  a 
valuation  of  8126,- 
000.  The  bank  also 
makes  out  a  card  for 
its  own  use  cover- 
ing the  whole  trans- 
action. This  would 
be  in  the  form 
shown  on  page  191. 


THE    PROPERTY    OF 


SECURITIES. 


The  loan  envelopo. 


6-19-1901-lM.  507  A 

THE   THIRTIETH  NATIONAL   BANK 

OF  THE  CITY  OF  NEW  YORK. 


No.  125 


lUcliard  Jfoe. 


190 


AMOUNT    LOANED. 


Mar.  4,  1902. 
AMOUNT    PAID. 


$ 


100000 


$ 


COLLATERALS. 


190 


The  bank's  envelope. 


1-JM90J4M 

Loan  No. . 
Fotlp  No. 


The  Thirtieth  National  Bank. 

New 


Demand  Loan  of  $ 
To 


COLLATERALS  Price     Value 


V- 


fcrv^t 


i-/ 


sb-v  -^^y ^S2-^a^/^t 


Record  of  call-loan. 


14 


191 


192  THE  WORK  OF  WALL  STREET 

The  words  at  the  bottom,  "  Received,  etc.,"  are  used 
when  the  loan  is  paid  and  the  securities  are  returned.  The 
borrower  then  signs  the  card,  which  becomes  the  receipt 
for  the  securities  given  back  to  him.  It  will  be  observed 
that  the  card  makes  no  mention  of  the  rate  at  which  the 
loan  is  made,  but  this  is  added  by  the  loan  clerk  in  cipher. 

It  often  happens  that  the  borrower  needs  to  substitute 
one  stock  for  another  in  the  collateral  for  the  loan.  He 
may  have  sold  one  of  the  stocks  and  desires  to  make  deliv- 
ery. The  bank  allows  him  to  withdraw  this  security  from 
his  envelope,  provided  he  gives  another  equally  as  good.  In 
the  instance  of  this  loan,  it  appears  from  the  card  that  one 
hundred  shares  of  Air-Brake  were  withdrawn  and  four 
hundred  shares  of  Steel  added,  which  made  the  collateral 
stronger  than  before  by  the  amount  of  $1,000  market 
value.  The  broker  making  the  substitution  would  send  to 
the  bank  by  messenger  the  four  hundred  shares  of  Steel 
and  the  memorandum  on  the  opposite  page. 

Frequently  there  are  several  substitutions  in  one  day. 
In  the  panic  of  May  9,  1901,  there  were  eleven  substitu- 
tions in  one  loan.  Substitution  receipts  are  deposited  by 
the  bank  in  the  big  envelope  in  which  it  keeps  the  broker's 
envelope  of  securities.  This  enables  the  bank  to  trace 
back,  step  by  step,  the  whole  course  of  the  loan  and  the 
changes  in  the  collateral  securing  it. 

In  making  loans  the  bank  scrutinizes  the  collateral 
closely.  The  securities  must  be  strictly  good  delivery  ac- 
cording to  the  rules  of  the  Exchange.  Stocks  and  bonds 
for  which  there  is  not  a  constant  market  are  generally  not 
acceptable.  The  most  approved  collateral  are  the  stocks  and 
bonds  of  standard  railroad  companies,  listed  at  the  Ex- 
change and  having  a  high  standing.  There  are  also  a  few 
industrial  companies  whose  stocks  are  equally  acceptable  as 
loan  collateral.  But,  as  a  rule,  most  banks  discriminate 
against  industrials  to  this  extent,  that  they  will  generally 
make  no  loan  on  industrial  collateral  alone,  or  if  they  do, 


3-4-1902-250  1327 

NEW  YOKE,  March  4,  1902 

THE  THIRTIETH  NATIONAL  BANK 

OF    THE    CITY    OF    NEW    YORK 

Will  please  deliver  to  the  bearer : 
100  Shares  Air -Brake 


and  receive 

400  Shares  U.  S.  Steel 


Eespectfully, 

RICHARD  ROE. 

Substitution  notice. 

193 


12-20-"J9-500  1073 

THE  THIRTIETH  NATIONAL  BANK 

OF    THE    CITY    OF    NEW    YORK. 

NEW  YORK,  Mar.  10,  1902. 


Mr.  Richard  Roe. 


DEAR  SIR: 

Please  send  us  about  $10,000 
additional  Collateral  to  our  loan  of  $100,000 
dated  Mar.  4,  1902, 

and  oblige 

Ycurs  respectfully, 

WILFRED  HOXE, 

Cash  ier 

Call  for  additional  collateral  manrin 
194 


THE  MONEY   MARKET  195 

they  charge  a  much  higher  rate  of  interest.  When  indus- 
trial stocks  are  accepted  it  is  generally  required  that  there 
must  be  railroad  or  other  approved  securities  with  them. 
In  the  loan  to  Richard  Roe,  as  originally  made,  the  indus- 
trial stocks  amounted  in  value  to  less  than  one-half  of  the 
collateral,  and  in  this  calculation  the  three  hundred  shares 
of  the  Western  Union  are  counted  as  industrial,  simply  be- 
cause the  Western  Union  is  not  a  railroad  company.  It  is 
needless  to  say  that  Government  bonds  always  rank  as  the 
very  highest  class  of  collateral,  and  the  banks  require  no  mar- 
gin on  such  security.  If  the  market  value  of  the  securities 
deposited  for  a  loan  declines,  the  banks  are  obliged  to  call  for 
more  collateral  in  order  to  keep  the  20  per  cent  margin 
good.  In  that  case  the  lender  will  receive  a  notice  like 
that  shown  on  the  opposite  page. 

The  bank  is  frequently  obliged  to  mark  up  the  rate  for  its 
call -loan.  For  instance,  the  loan  may  have  been  made  at  2^- 
per  cent,  but  the  market  rate  advances  to  3,  in  which  case  the 
bank  sends  the  notice  shown  on  page  196  to  the  borrower. 

The  whole  machinery  of  the  Street,  from  the  sale  of  a 
stock  in  the  Exchange,  its  clearance  through  the  Stock 
Clearing-IIouse,  its  delivery  to  the  buyer,  its  deposit  with 
a  bank  as  security  for  a  loan,  is  therefore  of  the  simplest 
and  most  direct  nature.  Each  party  to  every  transaction 
obtains  the  utmost  of  protection  with  the  least  labor  and 
the  smallest  possible  amount  of  "  red  tape." 

The  bank's  protection  consists  in  its  actual  holding  of 
the  collateral,  and  in  an  agreement,  which  its  customer 
signs,  enabling  the  bank  to  sell  the  securities,  without 
notice,  in  case  the  borrower  neglects  to  respond  to  the  call 
for  payment  of  the  loan.  This  agreement  is  generally  in 
the  following  form  : 

o 

HltOtD  till  HUn  bfl  tljCSC  Presents,  That  the  undersigned, 
in  consideration  of  financial  accommodations  given,  or  to  be  given, 
or  contimied  to  the  undersigned  by  THE  THIRTIETH  NATIONAL  BANK 
OF  THE  CITY  OF  NEW  YORK,  hereby  agree  with  the  said  Bank  that 


1311 

THE  THIRTIETH  NATIONAL  BANK 


OF    THE    CITY    OF    NEW    YORK. 


YORK,  Mar.  5,  1902. 
Mr.  Richard  Roe. 

DEAR  SIR: 

If  agreeable,  we  mark  your  loan  of 

$100,000,  dated   Mar.  4,  1002, 

$  .....  .....  dated  ..................................................................  - 

$  .....  .....  dated.... 


as  renewed  at     3     per  cent  from  this  date. 

Please  confirm  our  action  by  stamping  perforated 
slip,  which  kindly  return  to  us. 
Yours  respectfully, 

WILFRED  HONE, 

Cashier. 


We   mark  rate   of  interest  on  your   Loan     3    per 
cent  from  this  date. 


per.... 

Date  Mar.  />,  1902. 

Notice  of  increased  rale  of  interest. 
196 


THE  MONEY   MARKET  197 

whenever  the  undersigned  shall  become  or  remain,  directly  or  con- 
tingently, indebted  to  the  said  Bank  for  money  lent,  or  for  money 
paid  for  the  use  or  account  of  the  undersigned,  or  for  any  overdraft 
or  upon  any  indorsement,  draft,  guarantee  or  in  any  other  manner 
whatsoever,  or  upon  any  other  claim,  the  said  Bank  shall  then  and 
thereafter  have  the  following  rights,  in  addition  to  those  created  by 
the  circumstances  from  which  such  indebtedness  may  arise  against 
the  undersigned,  or  his,  or  their  executors,  administrators  or  assigns, 
namely  : 

1.  All  securities  deposited  by  the  undersigned  with  said  Bank, 
as  collateral  to  any  such  loan  or  indebtedness  of  the  undersigned  to 
said  Bank,  shall  also  be  held  by  said  Bank  as  security  for  any  other 
liability  of  the  undersigned  to  said  Bank,  whether  then  existing  or 
thereafter  contracted  ;  and  said  Bank  shall  also  have  a  lien  upon  any 
balance   of  the  deposit  account  of  the  undersigned  with  said  Bank 
existing  from  time  to  time,  and  upon  all  property  of  the  undersigned 
of  every  description  left  with  said  Bank  for  safe  keeping  or  otherwise, 
or  coming  to  the  hands  of  said  Bank  in  any  way,  as  security  for  any 
liability  of  the  undersigned  to  said  Bank  now  existing  or  hereafter 
contracted. 

2.  Said  Bank  shall  at  all  times  have  the  right  to  require  from 
die  undersigned  that  there  shall  be  lodged  with  said  Bank  as  security 
i'or  all  existing  liabilities  of  the  undersigned  to  said  Bank,  approved 
collateral  securities  to  an  amount  satisfactory  to  said  Bank;  and  upon 
the    failure   of  the   undersigned  at  all  times  to  keep   a   margin  of 
securities  with  said  Bank  for  such    liabilities   of   the   undersigned, 
satisfactory  to  said  Bank,  or  upon  any  failure  in  business  or  making 
of  an  insolvent  assignment  by  the  undersigned,  then  and  in  either 
event  all  liabilities  of  the   undersigned,  to  said  Bank,  shall  at  the 
option  of  said  Bank  become  immediately  due  and  payable,  notwith- 
standing any  credit  or  time  allowed  to  the  undersigned  by  any  instru- 
ment evidencing  any  of  the  said  liabilities. 

3.  Upon  the  failure  of  the  undersigned  either  to  pay  any  indebt- 
edness to  said  Bank  when  becoming  or  made  due,  or  to  keep  up  the 
margin  of  collateral  securities  above  provided  for.  then  and  in  either 
event  said  Bank  may  immediately  without  advertisement,  and  without 
notice   to   the   undersigned,  sell   any  of  the   securities   held   by  it  as 
against  any  or  all  of  the  liabilities  of  the  undersigned,  at  private  sale 
or  Brokers'  Board  or  otherwise,  and  apply  the  proceeds  of  such  sale  as 
far  as  needed  toward  the  payment  of  any  or  all  of  such  liabilities, 
together  with  interest  and  expenses  of  sale,  holding  the  undersigned 
responsible  for  any  deficiency  remaining  unpaid  after  such  applica- 
tion.    If  any  such  stile  be  at  Brokers'  Board  or  at  public  auction,  said 


108  THE  WORK  OF  WALL  STREET 

Bank  may  itself  be  a  purchaser  at  such  sale  free  from  any  right  or 
equity  of  redemption  of  the  undersigned,  such  right  and  equity  being 
hereby  expressly  waived  and  released.  Upon  default  as  aforesaid, 
said  Bank  may  also  apply  toward  the  payment  of  the  said  liabilities 
all  balances  of  any  deposit  account  of  the  undersigned  with  said  Bank 
then  existing. 

It  is  further  agreed  that  these  presents  constitute  a  continuing 
agreement,  applying  to  any  and  all  future  as  well  as  to  existing  trans- 
actions between  the  undersigned  and  said  Bank. 


Dated,  New  York,  the.— day  of 19 

Most  brokers  seek  to  secure  a  certain  proportion  of 
their  required  line  of  credit  on  time.  Thus  time-loans  are 
made.  These  are  loans  based  on  stock  and  bond  collateral, 
but  are  not  subject  to  call  until  the  expiration  of  a  certain 
specified  number  of  days,  when  they  must  be  paid  or 
renewed.  Formerly,  time-loans  were  made  by  months,  but 
within  two  or  three  years  a  change  has  been  made  from 
months  to  days.  Thus  there  are  thirty-day,  sixty-day,  and 
ninety-day  loans.  The  rates  for  time-loans  are  generally 
higher  than  for  call,*  and  banks  are  commonly  very  conserva- 
tive in  making  such  loans  for  long  periods.  The  bank's 
deposits  being  subject  to  withdrawal  on  demand,  it  follows 
that  it  can  lock  up  only  a  comparatively  small  part  of  its 
resources  in  the  form  of  time-loans.  The  stock-broker, 
though  paying  more  for  his  credit  than  he  would  on  the 
call-loan  basis,  escapes  the  liability  of  having  all  his  loans 
called  at  one  time. 

It  has  been  said  that  when  a  broker  pledges  as  collateral 
for  a  bank  loan  the  securities  wThich  lie  has  bought  for  a 
customer,  and  which  the  broker  holds  as  security  for  a  loan 
made  to  the  customer,  that  is  rehypothecation.  But  this  is 
the  universal  practise  of  the  Street,  to  which  every  operator 
in  stocks  tacitly  agrees.  The  illegality  of  the  operation 


•••I- 


Except  in  times  of  severe  stringency  in  the  money  market. 


THE  MONEY  MARKET  199 

can  be  avoided  by  an  agreement  between  brokers  and  cus- 
tomers. The  law  on  this  subject  was  expounded  a  few 
years  ago  by  Justice  Williams  in  the  Appellate  Division  of 
the  Xew  York  Supreme  Court.  He  held  practically  that 
when  securities  carried  on  margin  for  a  customer  were 
pledged  with  other  securities  for  loan  for  a  greater  amount 
than  the  indebtedness  of  the  customer  on  account  of  the 
purchase  of  the  securities,  and  without  the  broker  retain- 
ing in  his  possession  other  securities  of  a  like  kind  and 
amount,  that  was  conversion  by  the  broker  of  the  cus- 
tomer's property.  Hence  the  necessity  for  an  understand- 
ing between  brokers  and  customers  on  this  subject.  If  a 
customer  will  not  agree  to  this  absolutely  necessary  use  of 
his  securities,  he  might  as  well  keep  out  of  the  stock-market. 


CHAPTER  XVI 

THE    BANK    STATEMENT 

IT  need  scarcely  be  said  that  the  money  market  is 
closely  watched  by  every  stock-broker  and  operator.  The 
stock-market  is  keenly  sensitive  to  changes  in  the  money 
rate.  It  is  true  that  sometimes  the  stock-market  asserts  its 
independence  and  advances  in  spite  of  high  rates  for  loans, 
but,  as  a  general  rule,  any  shortage  in  the  supply  of  credit 
checks  stock  speculation  and  produces  declines  in  prices. 
Any  sudden  or  severe  contraction  of  credits  will  produce  a 
"  flurry  "  in  the  market — that  is,  a  sharp  break  in  prices 
attended  with  more  or  less  excitement.  If  the  contraction 
is  so  extreme  as  to  make  it  impossible  to  arrange  loans, 
large  blocks  of  securities,  which  can  not  be  carried,  are 
dumped  on  the  market  for  what  they  will  bring,  and  the 
Street  then  has  a  panic.  Wall  Street  therefore  scrutinizes 
the  Bank  Statement  with  the  utmost  care. 

This  statement  is  issued  by  the  Clearing- House  once  a 
week,  on  Saturday,  a  little  before  half  past  eleven.  If 
Saturday  is  a  holiday,  it  is  issued  on  Friday.  It  gives  the 
condition  of  all  the  member-banks  at  that  time,  their  loans, 
their  deposits,  their  cash  holdings,  and  their  circulation. 
The  statement  is  made  up  on  a  system  of  averages.  For 
instance,  the  bank  ascertains  what  its  outstanding  loans  were 
on  each  day  of  the  week,  and  reports  the  average  of  these 
items  to  the  Clearing-IIouse.  It  does  the  same  with  its 
deposits  and  cash  holdings.  The  statement,  therefore,  does 
not  present  the  actual  condition  of  the  banks  on  Saturday, 
200 


THE  BANK  STATEMENT  201 

but  their  average  condition  for  the  week.  Their  actual 
condition  may  be  better  or  worse.  It  follows  that  if  a  large 
amount  of  currency  should  be  received  on  Friday,  it  would 
count  only  for  one  day  in  the  week's  average  of  cash  hold- 
ings, and  the  actual  condition  of  the  banks  on  Saturday 
would  be  better  than  the  average  statement  indicated.  If 
there  had  been  a  large  withdrawal  of  gold  on  Friday,  for 
export,  the  loss  would  count  only  for  one  day  in  the  week's 
average,  which  would  make  the  statement  appear  better 
than  actual  conditions.* 

At  half  past  eleven  on  Saturday  every  Wall  Street  man 
watches  the  tape  for  the  report  from  the  Clearing-House. 
What  he  gets  at  first  is  a  mere  summary  of  the  statement, 
and  an  account  of  the  gains  and  losses  as  compared  with 
the  following  week.  For  example,  taking  the  statement  of 
February  21, 1902,  the  first  announcement  was  that  the  sur- 
plus reserve  had  decreased  $1,104,200  ;  loans  had  increased 
$4,752,900;  specie  had  increased  $343,500;  legal  tenders 
had  decreased  $398,900  ;  deposits  had  increased  $4,195,200  ; 
and  circulation  had  decreased  $59,800. 

This,  for  the  time  being,  is  sufficient  for  the  Street. 
One  half  hour  still  remains  of  the  stock-market,  which 
closes  at  noon  on  Saturday,  and  the  operator  knows  how 
the  banks,  as  a  whole,  stand,  and  can  act  accordingly.  But 
both  banker  and  broker  will  desire,  especially  in  critical 
periods,  to  know  more  of  the  situation,  and  so  will  study 
the  detailed  statement,  which  is  given  out  soon  after  the 
summary,  but  which  is  not  sent  over  the  tape.  The 
detailed  statement  gives  the  condition  of  each  bank,  but 
requires  analysis  for  a  complete  understanding.  The  state- 

*  A  striking;  illustration  of  the  effect  of  the  law  of  averages  upon  the 
Bank  Statement  was  given  in  September.  1902.  The  statement  of  Sep- 
tember 20  reported  a  loss  in  cash  of  $7.oOO,000.  while  the  actual  loss,  so 
far  as  it  could  be  estimated,  was  only  sS3.600.000.  The  statement  of 
September  27,  on  the  other  hand,  reported  a  gain  in  cash  of  $1,790,000, 
while  the  apparent  loss  was  $4.000.000.  The  former  statement  reported 
a  deficit  in  reserves;  the  latter  a  surplus. 


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204  THE  WORK   OP   WALL  STREET 

inent  issued  Friday,  February  21,  1902  (Saturday  was  a 
holiday),  is  of  interest  because  the  totals  of  deposits  and 
loans  reported  were  the  largest  up  to  that  time,  the  deposits 
being  $1,019,474,200,  and  the  loans  $911,800,900.  Omitting 
the  column  of  circulation,  and  adding  another  column  show- 
ing how  much  above  or  below  its  legal  reserve  each  bank 
was — something  which  the  statement  does  not  give — the 
statement  of  that  date  is  shown  on  pages  202  and  203. 

The  careful  student  of  the  Bank  Statement  will  exam- 
ine it  to  ascertain  which  of  the  large  banks  have  increased 
or  reduced  their  loans,  which  have  gained  or  lost  in  cash, 
and  which  are  above  or  below  their  legal  reserves.  To  as- 
certain the  legal  reserve  of  a  bank,  divide  its  deposits  by 
four,  and  the  difference  between  this  and  its  specie  and 
legal  tenders  added  together  shows  whether  it  is  above  or 
below  the  legal  requirement.  This  statement  shows  that 
although  loans  as  a  whole  expanded  $4,752,900,  four  big 
banks — the  First  National,  the  Bank  of  Commerce,  the  Corn 
Exchange,  and  the  American  Exchange — reported  an  aggre- 
gate loan  reduction  of  $6,155,000.  The  counterbalancing 
increases  were  widely  distributed,  the  Hanover  Bank  alone 
reporting  an  expansion  of  $2,127,000.  The  Bank  of  Com- 
merce, the  First  National,  and  the  American  Exchange 
reported  a  decrease  in  cash  of  $7,387,000,  while  the  Chase, 
the  Hanover,  the  Fourth,  the  City,  and  the  Manhattan 
Banks  reported  gains  amounting  to  $7,301,000. 

The  four  most  important  items  in  the  Bank  Statement 
are : 

1.  The  cash  holdings  which  are  ascertained  by  adding 
the  specie  and  legal  tenders.     The  cash  holdings  constitute 
the  reserves  of  the  banks. 

2.  The  outstanding  loans. 

3.  The  deposits. 

4.  The  surplus  reserve. 

Every  National  bank  is  required  by  law  to  hold  specie 
and  legal  tenders  amounting  to  at  least  25  per  cent  of  its 


THE   BANK  STATEMENT  205 

deposits.  The  moment  it  falls  below  that  amount  it  must 
stop  discounting  until  this  reserve  is  made  good.  State 
banks  are  by  law  required  to  keep  only  15  per  cent  reserve, 
but  the  Clearing-IIouse,  several  years  ago,  adopted  a  rule 
requiring  all  State  bank  members  admitted  after  that  date 
to  keep  25  per  cent  reserve,  the  same  as  the  National  banks. 
As  a  matter  of  fact,  all  members,  State  and  National,  strive 
to  keep  cash  holdings  at  a  point  equal  at  least  to  one-fourth 
of  the  deposits.  When  the  cash  holdings  exceed  the  re- 
serve required,  there  is  a  surplus ;  when  the  cash  holdings 
fall  below  the  required  reserve,  there  is  a  deficit.  The  surplus 
reserve,  therefore,  is  the  difference  between  the  required 
reserve  and  the  actual  reserve  when  the  latter  exceeds  the 
former.  There  may  be  an  increase  in  the  surplus  reserve 
when  there  is  a  decrease  in  the  reserve,  which  is  accounted 
for  by  a  reduction  in  the  amount  of  reserve  required  to  a 
larger  sum  than  a  reduction  in  the  cash  holdings.  For  in- 
stance, on  May  17,  1002,  the  reserve  decreased  $1,132,900, 
but  the  reserve  required  decreased  $6,018,425 ;  so  that 
there  was  an  increase  in  the  surplus  reserve  of  84,885,525. 
In  the  foreo-oino;  statement  of  Februarv  21  there  were 

00  «. 

forty  banks  that  showed  a  surplus  and  nineteen  that  showed 
a  deficit,  but  the  banks  as  a  whole  reported  a  surplus  re- 
serve of  $12,450,050,  which  was  20-f  per  cent  of  the  total 
deposits. 

The  Street  keeps  the  surplus  reserve  steadily  in  view ; 
in  fact  it  may  be  said  to  give  an  exaggerated  importance  to 
it.  The  line  between  a  surplus  and  a  deficit  is  regarded  as 
a  sort  of  a  "dead  line."  "When  the  surplus  reserve  declines 
too  close  to  the  line  the  Street  begins  to  show  signs  of 
alarm.  There  is  talk  of  stringent:  money  and  bear  prices. 
If  there  is  a  large  surplus  reserve,  money  is  easy  and  Wall 
Street  feels  secure.  Yet  too  large  a  surplus  may  be  a  bad 
sign,  as  it  indicates  a  small  demand  for  money  ;  it  may 
therefore  spell  stagnation.  If  the  statement  as  a  whole  re- 
ports a  deficit,  "Wall  Street  may  have  a  flurry,  even  a  panic. 


206  THE  WORK  OF  WALL  STREET 

Yet  even  a  deficit  may  be  no  just  occasion  for  alarm.  The 
Bank  Statement  has  at  times  reported  deficits  when  the  sit- 
uation was  sound  and  the  Street  in  a  calm.  For  instance, 
on  October  5,  1889,  there  was  a  deficit  of  $1,688,050,  which 
was  increased  the  following  week,  but  there  was  no  special 
convulsion  in  the  market.*  Still  it  is  true  that  in  time  of 
financial  distress,  as  in  the  fall  of  1890  and  in  1893,  the  first 
clear  sign  of  trouble  is  a  deficit,  the  cash  holdings  are  less 
than  the  required  reserve.  With  sound  banking,  however, 
there  is  no  reason  why  a  25-per-cent  reserve  should  be  ad- 
hered to,  as  with  loans  made  on  strictly  first-class  security  a 
bank  might  be  safe  with  5-per-cent  reserve.  With  loans 
made  on  wildcat  securities,  a  reserve  of  25  or  even  50  per 
cent  is  insufficient. 

The  25-per-cent  reserve  is  a  requirement  not  for  sound 
but  unsound  banking.  It  is  a  protection  not  for  the  strong, 
but  the  weak.  For  this  reason  there  have  been  suggestions 
that  the  Clearing-IIouse  should  require  a  general  reserve 
amounting  to  30  per  cent.  But  it  would  be  difficult  to  say 
what  is  the  point  of  safety  or  peril  in  a  reserve.  The  Eng- 
lish joint-stock  banks  usually  keep  cash  reserves  of  about 
one-tenth  of  their  credits,  and  the  Scottish  banks  are  able 
to  maintain  their  credits  upon  even  a  smaller  reserve.  Some 
of  the  strongest  trust  companies  in  Xew  York  are  able  to 
conduct  their  business  on  reserves  of  5  to  7  per  cent.  In 
May,  1902,  a  calculation  showed  that  the  deposits  of  all  the 

*  A  deficit  of  $1,642,050  was  reported  by  the  Bank  Statement  of 
September  20,  1902,  when  36  of  the  59  reporting  banks  held  less  than  the 
required  legal  reserve.  Yet  the  country  was  prosperous  as  never  before 
in  its  history.  The  mercantile  situation  was  sound  and  active.  The 
depletion  of  the  bank  resources  was  due  to  interior  demands  for  currency 
to  move  the  crops,  to  Treasury  absorptions,  and  to  speculative  activity. 
The  deficit  lasted  only  one  week,  when  the  reserve  was  restored  to  a  sur- 
plus. The  deficit  had  the  effect  of  producing  liquidation  in  stocks 
which  was  not  checked  by  the  restoration  of  the  surplus,  and  which 
required  Treasury  aid  to  stop.  In  seven  of  the  last  twenty  years  there 
have  been  periods  of  deficits  in  the  Xcw  York  bank  reserves.  Three  of 
these  were  years  of  panic. 


THE  BANK  STATEMENT  207 

banks  and  trust  companies  in  Greater  New  York,  taken 
together,  were  safe-guarded  by  a  reserve  of  less  than  15  per 
cent.  The  issue  has  been  raised  by  conservative  bankers, 
however,  whether  the  reserves  of  the  trust  companies  were 
not  altogether  too  low,  especially  the  reserves  of  those 
which  do  a  general  banking  business,  holding  their  deposits 
subject  to  withdrawal  by  checks. 

The  National  banks  raise  this  issue  on  two  grounds: 
First,  they  argue  that  they  are  compelled  to  keep  25-per- 
cent cash  reserve  in  unfair  competition  with  trust  com- 
panies which  are  doing  exactly  the  same  kind  of  business, 
and  some  of  which  maintain  reserves  of  only  1  per  cent. 
Second,  they  advance  the  point 

of  safety,  the  expansion  of  cred-  Deposits  51,019.000,000 

its    being  considered  too  large 
for  the  basis  of  cash. 

Bank  credits  may  be  repre- 
sented by  an  inverted  pyramid. 
Now,  an  inverted  pyramid  is 
employed  as  the  common  type 
of  insecurity,  but  as  Columbus 
stood  an  egg  on  end  by  flatten- 
ing it  a  little  on  the  end,  so  the 
inverted  pyramid  of  credit  may 
be  made  secure,  provided  the 

point  on  which  the  pyramid  stands  be  flattened  a  little ; 
or,  in  other  words,  the  credits  are  safe  if  the  reserves  are 
ample.  The  inverted  pyramid,  as  it  would  appear  from 
the  Bank  Statement  already  given,  shows  something  like 
the  above. 

But  if  the  bank  reserves  at  the  bottom  must  carry,  at 
the  top,  not  only  the  $1,000,000,000  of  credits  of  the  banks, 
but  also  the  credits  of  the  trust  companies,  amounting  to, 
say,  $700,000,000  more,  it  follows  that  the  inverted  pyramid 
may  become  top-heavy.  Hence  the  significant  action  taken 
recently  by  the  Bank  Clearing- House,  providing  that  every 
15 


THE  WORK  OP  WALL  STREET 

institution  hereafter  permitted  to  clear  through  a  member 
bank  "  shall  be  required  to  keep  in  its  vaults  such  cash 
reserve  to  its  deposits  as  the  Clearing-House  Committee 
may  determine."  While  this  action  now  extends  only  to 
new  trust  companies,  it  is  believed  that  it  is  the  entering 
wedge  to  a  requirement  that  all  trust  companies,  old  as  well 
as  new,  shall  maintain  reserves  more  equal  to  those  of  the 
banks  than  is  now  the  practise. 

It  may  be  added  that  the  organization  of  many  trust 
companies  doing  a  general  banking  business — eighteen  new 
ones  have  been  formed  in  this  State  in  four  years — has  in  a 
measure  changed  the  conditions  of  the  money  market  to 
such  an  extent  that  it  has  been  argued  that  the  Bank  State- 
ment is  no  longer,  as  formerly,  a  faithful  index  of  the 
monetary  situation.  But  this  is  not  strictly  accurate.  The 
Bank  Statement,  at  least,  reveals  the  state  of  the  cash 
reserves.  The  trust  companies  may  swell  the  total  of  loans 
to  an  unknown  extent,  but  the  banks  are  the  reserve  institu- 
tions, and  the  Street  knows  from  the  statement  just  what 
amount  of  reserve  there  is  at  the  bottom  of  the  great 
inverted  pyramid  of  credit. 

Every  analyzer  of  a  bank  statement  studies  the  item  of 
loans.  This  shows  whether  the  banks  are  expanding  or  con- 
tracting. Contraction  is,  of  course,  dreaded  by  the  Street, 
because  it  involves  the  calling  of  loans  and  an  advance  in 
the  rates  of  money,  making  it  more  difficult  to  carry  stocks. 
On  the  other  hand,  too  great  expansion  of  loans  may  seem 
dangerous,  as  overexpansion  has  been  the  chief  cause  of 
most  financial  crises.  Expansion  of  loans  always  increases 
the  deposits,  and  increased  deposits  call  for  larger  reserves. 

It  is  hard  to  make  the  uninitiated  understand  the  sig- 
nificance of  the  word  deposits.  The  deposits  may  amount 
to  $1,000,000,000,  and  yet  the  actual  money  held  by  the 
banks  may  be  only  a  quarter  of  that  sum.  Deposits,  there- 
fore, do  not  necessarily  mean  actual  money,  but  money  and 
credit  combined.  For  instance,  $10,000  in  cash  may  be 


THE  BANK  STATEMENT  209 

deposited  by  A  in  the  bank.  The  bank  loans  $5,000  to  B, 
who  thereupon  holds  it  there  as  a  deposit  to  draw  from. 
The  total  deposits  are,  therefore,  $15,000,  although  the 
actual  cash  is  only  $10,000.  Thus  an  expansion  in  loans 
always  swells  the  item  of  deposits. 

More  significant  than  all  the  other  items  of  a  bank  state- 
ment, as  has  already  been  shown,  are  those  representing 
cash  holdings.  Credit  may  be  the  vital  air  of  the  whole 
financial  system,  but  money  is  the  oxygen  in  the  air,  with- 
out which  there  would  be  suffocation  and  death.  So,  in 
analyzing  a  bank  statement,  the  reports  of  specie  and  legal 
tenders  are  of  first  importance.  Specie  means  both  gold 
and  silver.  Legal  tenders  mean  any  form  of  paper  money 
that  the  Government  makes  legal  tender  in  payment  of 
debts.  An  increase  in  cash  increases  the  credit-giving 
power  of  the  banks.  A  decrease  in  cash  involves  a  contrac- 
tion of  credit.  Much  is  heard  in  the  Street  from  time  to 
time  of  manipulation  of  the  Bank  Statement,  for  the  pur- 
pose of  influencing  the  stock-market.  Manipulation  of  the 
money  market  is  indeed  possible.  A  possible  way  of  redu- 
cing the  cash  holdings  of  the  banks  is  to  export  gold. 
Another  method  is  to  withdraw  legal  tenders,  and  deposit 
them  in  the  safe  of  a  trust  company  or  in  a  safe-deposit 
vault.  Daniel  Drew  is  said  to  have  carried,  in  1866,  several 
millions  of  dollars  in  cash,  in  a  carriage,  to  Jersey  City,  in 
order  to  produce  a  stringency  in  the  money  market,  There 
are  various  ways  of  hiding  money,  and  of  thus  reducing  the 
power  of  the  banks  to  make  loans.  It  would  be  difficult, 
however,  to  produce  proof  of  manipulation  of  this  character 
in  recent  years.  Suspicion  and  rumor  are  not  proof.  More- 
over, any  bank  guilty  of  complicity  in  any  such  conspiracy 
would  be  disgraced,  and  any  Xational  bank  which  would 
continue  to  receive  the  deposits  of  any  customer  after  he 
has  once  withdrawn  money  for  the  purposes  of  manipula- 
tion, would  be  regarded  as  having  condoned  a  dishonorable 
transaction.  But  hiding  of  monev  to  influence  the  rates  of 


210  THE  WORK  OP  WALL  STREET 

loans  and  prices  of  stocks  does  not  involve  manipulation  of 
the  bank  statement  itself.  The  individual  banks  may  have 
different  ways  of  making  up  their  averages,  but  the  state- 
ment itself  is  an  honest  exhibit  of  average  conditions  for  the 
week  under  review.  There  may  be  manipulation  outside 
the  Clearing- House  ;  there  is  none  in  it. 

It  is  a  fair  estimate  that  90  per  cent  of  all  the  money  in 
New  York  is  held  by  the  Clearing-House  banks.  As  the 
cash  holdings  of  the  banks  are  what  constitute  their  power 
of  extending  credit,  the  movement  of  money  becomes  a 
matter  of  vital  importance.  Are  the  banks  gaining  or  los- 
ing cash  ?  That  is  the  question  of  questions.  There  are 
three  principal  movements  of  money  : 

1.  The  export  or  import  of  specie. 

2.  The  shipment  of  currency  to  the  interior  or  receipt 
of  currency  from  the  interior. 

3.  The  payment  of  money  into  the  United  States  Treas- 
ury and  the  disbursements  of  money  by  the  Treasury. 

The  first  of  these  movements  will  be  explained  in  the 
chapter  on  Foreign  Exchange,  and  the  third  in  the  chapter 
on  The  Subtreasury. 

The  currency  movement  from  and  to  the  interior  is 
chiefly  controlled  by  the  deposits  or  withdrawals  by  the 
country  banks.  It  has  already  been  shown  that  these  banks 
can  keep  half  of  their  legal  reserves  in  New  York  banks 
and  draw  interest  thereon.  The  New  York  banks,  there- 
fore, are  continually  liable  to  calls  from  these  banks 
whenever  the  local  demand  for  money  becomes  acute. 
In  addition  to  acting  as  depositories  for  the  reserves 
of  the  country  banks,  the  New  York  banks  act  practically 
as  clearing-agents  for  a  large  part  of  the  commerce  of  the 
United  States.  Thus  interior  manufacturers  and  agricultur- 
ists are  continually  sending  their  products  to  New  York  for 
sale.  The  money  paid  for  these  products  is,  of  course,  paid 
through  the  banks.  On  the  other  hand,  the  interior  is  con- 
tinually buying  articles  of  merchandise  in  New  York,  and 


THE  BANK  STATEMENT  211 


the  money  paid  for  these  articles  is  paid  through  the 
so  that  there  is  a  constant  inflow  and  outflow  of  money. 
The  Wall  Street  man  watches  this  movement  keenly,  as  on 
it  may  depend  the  course  of  the  stock-market.  If  New 
York  is  sending  to  the  interior  more  than  it  is  receiving, 
the  banks  are  losing  cash,  and  there  will  be  a  contraction  of 
loans,  unless  the  loss  to  the  interior  should  be  counter- 
balanced by  imports  of  gold  or  heavy  Treasury  disburse- 
ments. On  the  other  hand,  if  the  balance  is  in  favor  of 
Xew  York  the  banks  should  be  gaining  cash. 

The  Street  is  not  content  to  wait  for  the  Bank  Statement 
for  knowledge  of  the  movement  of  money.  The  exports 
and  imports  of  gold  are  generally  known  as  soon  as  arrange- 
ments are  made  for  the  shipments.  Daily  statements  are 
given  of  the  receipts  and  disbursements  of  the  Treasury, 
and  some  idea  of  the  interior  movement  is  obtained  during 
the  week  by  inquiry  at  the  leading  banks,  which  have  large 
dealings  with  interior  institutions. 

In  domestic  as  in  foreign  exchange  there  comes  a  time 
when  balances  have  to  be  settled  in  cash.  These  settlements 
may  be  delayed  by  various  causes.  For  instance,  if  rates 
for  loans  are  higher  here  than  in  the  interior,  the  interior 

~  t 

institutions,  instead  of  calling  for  the  money  due  them, 
may  loan  it,  in  the  Xew  York  market.  Western  loans  in 
Xew  York  have  become  a  feature  in  the  money  market  in 
the  last  few  years. 

An  anxious  period  in  the  money  market  is  the  crop- 
moving  time.  That  is  the  period  of  the  year  when  the 
grain  crops  of  the  "West  and  the  cotton  crops  of  the  South 
are  being  harvested  and  forwarded  to  the  markets.  When 
it  is  recalled  that  in  1900  there  were  nearly  three  and  one- 
lialf  billion  bushels  of  corn,  oats,  and  wheat,  and  more  than 
five  billion  pounds  of  cotton  produced,  some  conception 
may  be  had  of  the  service  the  banks  of  the  country  per- 
formed in  financing  the  harvesting  of  these  immense  crops. 
Xot  all  the  burden  of  this  falls  on  the  Xew  York  banks, 


212 


THE  WORK  OP   WALL  STREET 


but  a  heavy  share  of  it  does,  and  it  takes  a  large  sum  of 
money  out  of  Wall  Street  in  the  last  half  of  the  year.  This 
movement  requires  shipments  of  currency,  usually  in  bills 
of  small  denominations.*  The  banks  can  send  this  money 
by  express  or  registered  mail  or  by  telegraphic  transfers 
through  the  Subtreasury.  The  latter  is  the  more  conve- 
nient and  the  quickest  way,  but  is  restricted  to  Subtreasury 
points.  By  depositing  in  the  Subtreasury  the  amounts 
required  to  be  shipped,  that  institution  will  telegraph  to 
another  Subtreasury  to  pay  a  similar  amount  to  the  bank 
which  is  to  receive  the  currency  in  that  city.  As  an  indica- 
tion of  the  size  and  duration  of  the  movement,  the  following 
statement  of  the  telegraphic  transfers  of  currency  by  the 
Subtreasury  in  1900  and  1901  is  of  interest : 


1900 


Chicago. 

West. 

New  Orleans. 

Total. 

July  and  August 

$350.000 

$350.000 

September  

$600,000 

$1,  550,000 

4,485,000 

6,640,000 

October  

2,750  000 

1,950,000 

3,555.000 

8,250,000 

November  

1  000  000 

100,000 

2.600,000 

3,700.000 

December  

400,000 

4,700,000 

5,100,000 

$4,750,000 

$3,600,000 

$15,690,000 

$24,040,000 

1901 


Chicago. 

West. 

New  Orleans. 

Total. 

July  

$900.000 

$425.000 

$1.325,000 

August  

3.150.000 

300,000 

3,450,000 

September  

2,050,000 

$500.000 

1,985.000 

4.535,000 

October  

370,000 

3.645.000 

4.015,000 

November.   .  .  . 

200  000 

1,730.000 

1,930,000 

December  

1,300.000 

4.570.000 

5.870,000 

$7,600.000 

$870,000 

$12.655.000 

$21,125,000 

*  The  small  farmer  keeps  no  bank  account  and  must  be  paid  in  cur- 
rency and  not  by  check.     lie  must  pay  his  hands  in  cash. 


THE  BANK  STATEMENT  213 

The  crop-moving  period  often  subjects  "Wall  Street  to  a 
severe  strain.  The  stock-market  has  more  than  once  suf- 
fered from  this  cause,  and  the  Treasury  has  been  called 
upon  to  afford  relief  by  buying  bonds,  in  order  to  liberate 
money  held  in  the  Treasury  and  which  can  be  got  into 
circulation  in  no  other  way. 

A  great  money  market  like  that  of  New  York  possesses 
many  sources  of  supply  of  credit.  High  interest  rates 
open  the  conduits  through  which  streams  flow  from  one  or 
more  reservoirs  of  credit.  From  the  Klondyke  come  new 
supplies  of  the  yellow  metal.  Australian  gold,  imported 
into  San  Francisco,  is  instantly  made  available  in  New 
York  by  telegraphic  transfers  through  the  Treasury.  Great 
banks  in  Chicago  and  other  A\restern  cities  make  direct 
loans  in  Wall  Street  on  stock  collateral  or  commercial 
paper.  Europe,  by  a  transfer  of  credit,  loans  its  capital  in 
New  York,  or,  if  the  interest  rates  advance  high  enough, 
foreign  exchange  rates  may  decline  to  the  importing  point, 
and  an  actual  stream  of  gold  flows  into  the  Street. 

In  the  past  five  years  there  has  been  a  notable  expansion 
in  the  size  of  the  money  market.  Wall  Street  has  required 
larger  banking  machinery.  The  formation  of  great  syndi- 
cates and  immense  corporations  have  called  for  banks  of 
larger  capital  and  resources.  Syndicates  that  are  conduct- 
ing operations  involving  tens  and  perhaps  hundreds  of 
millions  of  dollars  require  accommodations  that  would  have 
seemed  incredible  a  few  years  ago.  So  two  banks  have 
increased  their  capital  to  $10,000,000,  and  another  has 
recently  increased  to  825,000,000  capital  and  815,000,000 
surplus,  a  total  of  810,000,000.  Others  have  augmented 
their  facilities  in  other  wavs.*  Laro;e  State  banks  have 

•j  O 

*  In  July,  1892.  there  were  64  hanks  members  of  the  Clearing-House 
having  a  capital  of  §60.872.700.  In  July.  1902,  there  were  59  banks  in 
the  Clearing-House  having  a  capital  of  $98.872,700.  an  increase  of 
$38.300,000  in  ten  years,  although  there  were  five  less  banks.  In  July. 
1898,  the  net  deposits  of  all  the  banks  amounted  to  $534,608.400,  of 


214  THE  WORK   OF  WALL  STREET 

established  numerous  branches.  Chains  of  banks  have 
been  formed — that  is,  a  number  of  banks  controlled  by 
one  set  of  capitalists.  There  has  been  a  notable  con- 
centration of  banking  capital.  Several  of  the  principal 
banks  are  closely  allied  with  the  most  powerful  private 
bankers  and  the  greatest  individual  capitalists  and  corpora- 
tions. Thus  it  is  possible  to  mass  the  bulk  of  the  banking 
power  of  Wall  Street  upon  any  enterprise  in  which  these 
capitalists  are  interested.  Whether  this  concentration  of 
the  money  power  is  a  thing  to  be  feared  or  welcomed,  is  a 
question  that  is  not  germane  to  the  purpose  of  this  book. 
Every  one  will  answer  it  in  accordance  with  his  own  point 
of  view.  It  is  practically  the  same  question  that  is  involved 
in  the  organizations  of  the  trusts  and  the  consolidation  of 
the  railroads. 

Wall  Street  not  only  watches  its  own  Bank  Statement, 
but  so  intimately  connected  have  become  all  the  markets  of 
the  world  that  it  also  studies  the  statements  of  the  big 
Government  banks  of  Europe.  The  Bank  of  England 
statement  is  issued  on  Thursday,  and  the  trained  eye  of  the 
financier  can  read  in  it  the  conditions  of  the  English  money 
market,  which  is  the  most  powerful  in  the  world.  The 
Bank  of  England  discount  rate  sounds  the  key-note  of  the 
international  monetary  situation. 

which  $86,980,800,  or  about  16  per  cent,  was  in  the  four  banks  having 
the  largest  capital.  In  July,  1902,  the  total  deposits  were  $958,647,500, 
of  which  $285,127,200,  or  nearly  30  per  cent,  was  in  the  four  largest 
banks.  It  is  clear,  therefore,  that  the  tendency  is  toward  the  concent  ra- 
tion of  banking  power.  According  to  a  report  of  the  Comptroller  of  the 
Currency  there  were  on  July  16,  1902.  sixty  national  banks  in  the  United 
States  with  deposits  exceeding  $10,000,000  each.  Twenty-two  of  these 
were  in  New  York. 


SUBTEEASUKY    AND    ASSAY    OFFICE 

IT  lias  become  almost  an  unwritten  law  of  politics  that 
no  Secretary  of  the  Treasury  can  be  selected  from  "Wall 
Street.  The  reason  for  this  is  obvious.  Many  people  fear 
the  power  of  the  Street,  and  do  not  want  it  to  have  too 
strenuous  an  influence  in  the  Treasury  Department.  Yet 
every  Secretary  of  the  Treasury,  from  whatever  section  of 
the  country  he  comes,  is  inevitably  brought  into  intimate 
relations  with  Wall  Street.  It  is  not  meant  by  this  that 
the  Secretary  engages  in  stock  speculation  or  uses  his  offi- 
cial power  to  advance  or  depress  prices.  Xo  such  scandal 
as  that  has  developed.*  But  there  is  the  closest  possible 
bond  between  the  Treasury  and  the  money  market.  "When 
the  Government  needs  money  for  the  purposes  of  war,  it 
must  come  to  the  money  market  for  it.  AY  hen  it  desires 
gold  in  order  to  maintain  specie  payments,  it  has  to  come  to 
the  Street  for  it.  When  it  desires  to  refund  its  bonds  at  a 
lower  rate  of  interest,  the  operation  generally  has  to  go 
through  Wall  Street.  If,  on  the  other  hand,  the  business 
interests  require  relief  which  the  Treasury  is  able  to  afford, 
it  is  mainly  through  Wall  Street  that  the  Treasury  is  able 
to  let  out  a  part  of  its  surplus  by  means  of  payments  for 

*  "The  Secretary  of  the  Treasury,  by  his  control  of  the  public  debt, 
has  no  doubt,  means  of  affecting  the  markets  :  but  I  have  never  heard  of 
any  charge  of  improper  conduct  in  such  matters  on  the  part  of  any  one 
connected  with  the  Treasury  Department." — Prof.  James  Bnjce  in 
The  American  Commomvealth. 

215 


216  THE   WORK   OP   WALL  STREET 

bond  redemptions.  In  a  score  of  ways  the  Treasury  and 
the  Street  are  brought  into  close  contact. 

The  Secretary  of  the  Treasury  is  the  head  of  the  three 
greatest  institutions  of  Wall  Street,  the  Subtreasury,  the 
Assay  Office,  and  the  Custom-IIouse.  His  direct  represent- 
ative in  the  Street  is  the  Assistant  Treasurer,  who  is  a 
member  of  the  Cleaning-House,  through  which  the  Sub- 
treasury  makes  its  daily  exchanges  the  same  as  a  bank.  In 
times  of  financial  distress,  it  is  customary  for  the  Secretary 
to  meet  the  leading  bankers  at  the  Subtreasury  to  consider 
measures  of  relief.  The  Assistant  Treasurer  is  an  official 
of  higher  standing  than  his  title  would  indicate.  He  draws 
the  salary  of  a  cabinet  officer,  a  salary  larger  even  than  that 
of  the  Treasurer  at  Washington. 

Through  the  Subtreasury  flow  more  than  one-half  of 
the  aggregate  receipts  and  expenditures  of  the  United 
States  Government.  Into  it  flow  the  receipts  of  the  Cus- 
tom-IIouse, of  the  Post-Office,  and  of  other  large  Govern- 
ment offices.  Out  of  it  flow  the  payment  of  interest  on 
bonds,  payments  for  pensions,  and  the  manifold  disburse- 
ments of  the  Government  for  army,  navy,  and  other  pur- 
poses. The  Subtreasury  is  also  the  main  agency  of  the 
Government  in  the  floating  of  new  loans,  in  the  redemp- 
tion of  bonds,  and  the  larger  financial  policies  of  the  Treas- 
ury Department.  The  high  standing  of  the  office  of  As- 
sistant Treasurer  is  indicated  by  the  character  of  the  men 
who  have  held  it  since  its  establishment  in  1S-K5  :  William 
C.  Bouch,  John  Young,  Luther  Bradish,  John  A.  Dix, 
John  J.  Cisco,  John  A.  Stewart,  II.  II.  Tan  Dyck,  Daniel 
Butterfield,  Charles  J.  Folger,  Thomas  Hillhouse,  Thomas 
C.  Acton,  C.  J.  Canda,  Alexander  McCue,  E.  II.  Roberts, 
and  Conrad  X.  Jordan. 

The  establishment  of  the  Subtreasury  followed  the  fall 
of  the  United  States  Bank,  and  for  fifty-six  years  it  has 
been  the  basis  of  the  Government's  financial  system.  Be- 
sides the  main  Treasury  in  Washington,  the  Government 


SUBTREASURY  AND  ASSAY  OFFICE  217 

maintains  Subtreasuries  in  New  York,  Philadelphia,  Chi- 
cago, Baltimore,  Boston,  Cincinnati,  New  Orleans,  St.  Louis, 
and  San  Francisco,  and  keeps  a  certain  proportion  of  its 
money  in  each  of  these  places.  As  already  indicated,  the 
New  York  Subtreasury  is  the  most  important.  But  the 
prevailing  agitation  in  financial  circles  is  for  the  abolition 
of  the  Subtreasury .  system,  and  even  some  of  those  most 
closely  connected  with  it  are  most  opposed  to  it.  It  has 
been  said  that  the  Treasury  ought  not  to  be  a  hoarder  of 
money.  An  ideal  Government  policy  would  be  one  in 
which  the  yearly  receipts  and  expenditures  of  the  Govern- 
ment nearly  balanced  each  other,  leaving  a  very  small  sur- 
plus, and  in  which  all  the  money  received  and  disbursed 
was  kept  all  the  time  in  circulation.  Every  dollar  absorbed 
by  the  Treasury  is  a  contraction  of  credit.  This  is  the  de- 
fect of  the  Subtreasury  system,  that  it  keeps  large  amounts 
of  money  locked  up  in  the  Government  vaults  that  might 
and  should  be  in  use  for  the  purposes  of  business. 

The  problem  that  confronts  every  Secretary  is,  at  one 
time,  How  shall  a  deficit  in  the  Government  revenues  be 
met  ?  and  at  another,  How  shall  a  surplus  in  the  Treasury 
be  made  as  little  a  burden  upon  commerce  as  possible  ?  At 
one  time  he  is  struggling  to  get  money  into  the  Treasury, 
and  another  to  get  it  out.  The  getting  it  in  is  a  problem 
of  taxation  or  sale  of  bonds.  The  getting  it  out  is  a  prob- 
lem of  appropriations,  of  deposits  in  the  banks,  or  of  pur- 
chase of  bonds.  There  is  a  limit,  however,  to  the  ability 
of  the  Treasury  to  keep  the  Government  money  in  the 
channels  of  trade.  Deposits  of  Government  money  in  the 
banks  must  be  secured  by  deposits  of  Government  bonds 
by  the  depository  banks  in  the  Treasury.  There  is,  of 
course,  a  limit  to  the  ability  or  willingness  of  the  banks  to 
buy  bonds  for  this  purpose.  Early  in  Eebruary,  1902,  there 
were  four  hundred  and  forty-five  depository  banks,  in  which 
the  Government  held  $113,000,000  of  deposits.  When  the 
Treasury  has  a  surplus,  its  only  effective  ways  of  reducing 


218  THE  WORK  OF  WALL  STREET 

it  are  either  to  enter  into  lavish  public  works  or  else  to  re- 
deem or  purchase  its  own  bonds. 

But  the  purchase  of  bonds  inevitably  keeps  their  market 
price  at  a  high  point,  and  discourages  their  use  by  the  banks 
as  a  basis  for  bank-note  circulation.  As  a  matter  of  fact 
the  policy  of  bond  purchases  has  had  that  effect  this  year, 
and  thus,  while  on  the  one  hand  the  redemptions  have  in- 
creased the  amount  of  money  in  circulation  outside  the 
Treasury,  the  retirement  of  bank-notes,  even  up  to  the  legal 
limit  of  $3,000,000  a  month,  reduces  the  money  in  circula- 
tion. The  banks  find  it  more  profitable  to  sell  their  bonds 
than  to  keep  them  as  a  basis  for  circulation. 

Hence  the  agitation  for  abolition  of  the  Subtreasury 
system.  ''  This  country,"  said  Joseph  C.  Hendrix,  Presi- 
dent of  the  Bank  of  Commerce,  at  the  Clearing-IIouse 
memorial  meeting  in  honor  of  the  late  F.  D.  Tappan,  "  is 
without  a  bank  of  ultimate  reserve.  There  is  no  reservoir 
of  cash  to  which  institutions  dispensing  credit  may  go  when 
in  need.  It  is  the  one  glaring  defect  in  our  banking  system. 
The  Subtreasuries  of  the  Government  stand  like  relics  of  a 
primitive  civilization,  helpless  to  answer  the  sharpest  neces- 
sities of  national  commerce." 

It  was  to  remedy  this  glaring  defect  that  Lyman  J. 
Gage,  when  Secretary  of  the  Treasury,  advocated  the  cre- 
ation of  a  big  central  bank,  or  bank  of  banks,  in  which 
the  Government  would  keep  its  deposits — a  revival  in  a  dif- 
ferent form  and  under  different  regulations  of  the  old 
United  States  Bank  policy.  Mr.  Gage's  proposition  was 
that  the  stock  of  this  central  bank  should  be  owned  by  the 
four  thousand  or  more  National  banks  throughout  the 
country;  that  its  capital  should  be  $50,000,000;  that  it 
should  receive  the  accounts,  not  of  individuals  and  corpora- 
tions, but  of  the  Government  and  the  stockholding  banks ; 
that  it  should  make  loans  to  them  ;  and  that  it  should  thus 
supersede  the  Subtreasury  system,  and  keep  the  funds  of 
the  Government  in  the  channels  of  trade. 


SUBTREASURY  AND   ASSAY   OFFICE  219 

Tliis  subject  of  a  substitute  for  the  Subtreasury  sys- 
tem is  closely  allied  with  the  subject  of  currency  reform. 
In  fact,  both  go  together.  There  is  a  general  agreement 
among  bankers  and  others  who  have  given  the  problem 
study  that  something  should  be  done.  There  is,  however, 
a  wide  difference  of  opinion  as  to  what  should  be  done. 
Mr.  Gage's  proposition  has  by  no  means  met  with  universal 
favor.  This  is  the  most  pressing  financial  problem  now 
confronting  the  country,  and  it  is  one  in  which  Wall  Street 
is  vitally  concerned.  Further  reference  to  it  will  be  found 
in  the  chapter  on  Panics. 

It  has  already  been  shown  how  frequently,  in  times  of 
money  stringency,  the  Secretary  of  the  Treasury  has  come 
to  the  relief  of  the  market  with  offers  to  purchase  bonds. 
This  relief,  though  slow  and  inadequate,  has  often  been 
quite  effective.  Believing  that  it  would  be  of  interest  to 
secure  from  the  Treasury  an  official  statement  of  the  differ- 
ent times  this  relief  has  been  extended,  the  author  wrote  to 
the  Treasury  Department,  and  in  reply  received  the  follow- 
ing: 

TREASURY  DEPARTMENT, 

OFFICE  OF  THE  SECRETARY, 

WASHINGTON,  January  15,  1902. 
Mr.  SERENO  S.  PKATT, 

Herald  Building,  New  York,  K  Y. 
SIR:  In  reply  to  your  letter  of  the  13th  instant,  you  are 
informed  that  it  would  be  impracticable  for  the  Department 
to  furnish  you  with  a  statement  showing  the  purchases  of 
United  States  bonds  for  the  purpose  of  relieving  stringent 
money  markets,  made  by  the  Secretaries  of  the  Treasury 
from  the  time  of  Hamilton  to  the  present.  It  has  been  the 
practise  of  the  Department  to  redeem,  or  purchase,  United 
States  bonds,  as  the  case  might  be,  from  time  to  time,  when- 
ever the  surplus  revenues  would  authorize  such  proceeding, 
and  without  specific  regard  to  the  condition  of  the  money 
market ;  though  it  should  be  said  that,  as  a  stringent  money 
market  usually  affects  adversely  the  values  of  all  securities. 


220  THE  WORK  OF   WALL  STREET 

the  Government  has  generally  been  successful,  at  such 
times,  in  obtaining  large  amounts  of  bonds  at  comparatively 
low  prices. 

It  would  be  practicable  to  furnish  you  a  statement  of 
the  purchases  and  redemptions  of  United  States  bonds,  by 
fiscal  years,  since  the  Civil  War,  but  a  statement  like  this, 
it  is  assumed,  would  not  answer  your  purpose. 
Respectfully  yours, 

H.  A.  TAYLOR, 

Assistant  Secretary. 

This  is  important  as  an  official  statement  of  Government 
policy.  In  purchasing  its  own  bonds  the  Government 
attains  two  ends :  first,  it  reduces  the  principal  and  inter- 
est of  its  debt ;  second,  it  restores  to  the  channels  of  busi- 
ness the  surplus  money  of  the  Treasury.  The  Government 
prefers  to  be  understood  as  acting  for  the  first  purpose 
alone.  As  a  matter  of  fact,  it  has  a  dual  motive  and  per- 
forms a  dual  service  to  the  country  whenever  it  purchases 
bonds.  But,  as  has  been  said,  there  is  a  limit  to  the  relief 
the  Treasury  can  thus  afford.  The  process  of  purchasing 
bonds,  if  continued  steadily,  results  in  advancing  their 
prices,  and  in  thus  tempting  the  banks  to  retire  their  note 
circulation  in  order  to  recover  the  bonds  securing  the  same, 
and  then  to  sell  the  bonds  at  the  highest  price.  Secretary 
Shaw,  early  in  1902,  was  obliged  to  discontinue  the  pro- 
cess of  bond  purchases,  believing  that  the  situation  no 
longer  required  this  form  of  relief.* 

*  Tn  the  severe  money  stringency  of  September,  1902,  he  was,  how- 
ever, forced  to  return  to  the  policy  of  buying  bonds.  lie  first  tried  to 
induce  the  national  banks  to  increase  their  note  circulation.  Then  he 
offered  to  anticipate  the  interest  on  all  the  bonds  up  to  June,  1903. 
These  measures  being  insufficient  to  relieve  the  situation,  and  Wall 
Street  being  threatened  with  a  monetary  panic,  the  Secretary  permitted 
the  national  bank  depositories  of  Government  money  to  use  it  without 
the  necessity  of  maintaining  the  25-per-cent  reserve  required  for  com- 
mercial deposits.  lie  also  decided  to  permit  such  depository  banks  as 


SUBTEEASURY  AND  ASSAY  OFFICE  221 

Among  the  many  minor  services  of  the  Subtreasury  for 
the  money  market  is  to  act  as  the  agent  for  the  transfer  of 
money  from  one  part  of  the  country  to  another.  Thus,  by 
its  system  of  telegraphic  transfers,  gold  arriving  at  San 
Francisco  from  Australia  and  the  Klondyke  can  be  made 
immediately  available  in  New  York ;  and  likewise,  when 
currency  is  needed  in  the  interior  "to  move  the  crops," 
New  York  banks  can  transfer  the  currency  to  Subtreasury 
points  by  telegraphic  transfers.  To  other  than  Subtreas- 
ury points  the  transfers  have  to  be  made  by  express  or 
mail.  The  Subtreasury  charges  are  the  same  as  the 
express  charges  to  the  same  points  ;  for  instance,  75  cents 
per  $1,000  to  New  Orleans,  and  50  cents  to  Chicago,  St. 
Louis,  and  Cincinnati. 

The  Assay  Office  is  a  branch  of  the  United  States  Mint, 
and,  as  its  name  indicates,  it  receives  and  assays  deposits  of 
gold  and  silver  and  returns  the  same  to  the  depositors  in 
the  shape  of  bars,  or  the  Government  will  give  coin  for  the 
value  of  the  gold.  An  interesting  book  could  be  written 
about  the  Assay  Office,  its  methods  of  melting  and  refining, 
and  its  marvelous  scales,  which  are  so  delicately  adjusted 
that  they  can  weigh  one-half  of  one  hair  of  a  person's  head. 
It  is  from  this  office  that  the  exporters  of  gold  obtain  most 
of  the  yellow  metal  for  shipment ;  and  it  is  in  this  connec- 
tion that  the  Assay  Office  becomes  an  important  part  of  the 
mechanism  of  Wall  Street.  In  this  office  we  are  confronted 
with  the  evidence  of  the  dual  character  of  gold  as  money 
or  a  medium  of  exchange,  and  as  merchandise,  an  article 

would  take  out  increased  circulation,  to  use  their  government  bonds  for 
that  purpose,  substituting  for  them  as  part  security  for  the  deposits, 
State  and  Municipal  bonds,  under  restrictions  that  would  safeguard  the 
Treasury  against  loss.  All  of  which  shows  to  what  measures  a  Secretary 
of  the  Treasury  must  resort  in  order  to  counteract  the  credit  contracting 
effect  of  Treasury  absorptions.  Tt  affords  a  fresh  illustration  of  the 
dependence  of  the  business  interests  of  the  country  upon  the  Secretary 
of  the  Treasury,  and  of  the  hitter's  enormous  power  in  the  markets.  For- 
tunate it  is  that  this  power  has  been  honestly,  and  generally  wisely  used. 


222  THE  WORK  OF  WALL  STREET 

itself  bought  and  sold  tlie  same  as  pig-iron.  The  Assay 
Office  makes  two  kinds  of  gold  bars  for  sale:  small  bars 
varying  in  value  from  $100  to  $700,  which  are  bought  for 
use  in  the  arts  and  sciences ;  and  large  bars  varying  in 
value  from  $5,000  to  $8,000,  which  are  used  for  the  export 
of  the  precious  metal.  These  bars  are  stamped  with  weight 
and  fineness  as  ascertained  by  the  assay.  Exporters  pay 
4  cents  per  $100  for  them,  but  even  at  this  cost  the  bars 
are  cheaper  than  coin  would  be. 

The  coin  can  be  obtained  without  premium  at  the  Sub- 
treasury  on  presentation  of  legal  tenders,  but  coin  is  infe- 
rior to  bars  for  export,  because  more  easily  abrased.  The 
stamp  of  the  United  States  on  a  coin  is  effective  only  within 
our  own  boundaries.  As  soon  as  the  coin  reaches  a  foreign 
country,  its  value  is  determined  not  by  the  stamp  upon  it 
but  by  its  weight.  So,  when  we  are  compelled  to  pay  our 
debts  by  a  gold  shipment,  the  gold,  whether  it  be  bars  or 
coin,  is  weighed  and  its  value  ascertained.  Coin  loses 
value  by  handling.  Even  new  coin  carried  in  bags  loses 
value  by  abrasion  during  the  trip  across  the  Atlantic.  It  is 
stated  at  the  Assay  Office  that  if  a  bag  of  gold  coin  is  put 
on  the  scales  and  weighed,  then  lifted  on  to  the  floor,  and 
then  immediately  put  on  the  scales  again,  the  mere  move- 
ment which  this  simple  operation  has  involved  will  cause  an 
abrasion  such  as  will  show  a  difference  in  weight.  Bars,  on 
the  other  hand,  can  be  easily  handled  without  much,  if  any, 
friction.  When  they  arrive  on  the  other  side  there  is  little 
loss  in  weight.  In  a  big  gold  shipment  this  means  much. 

Some  objection  has  been  made  to  the  policy  of  the  Gov- 
ernment facilitating  gold  shipments  by  the  sale  of  these 
bars.  But  in  answer  to  this  it  is  argued  that  when  we  owe 
money  to  Europe  and  our  creditors  demand  payment,  we 
must  pay,  whatever  the  cost  of  shipment.  If  our  own 
Government  increases  the  cost  of  obtaining  the  gold  for 
payment,  that  makes  no  difference  to  our  creditors,  but  it 
does  to  us  as  the  debtors,  because  it  makes  our  burden  and 


SUBTREASURY  AND  ASSAY  OFFICE  223 

expense  greater.  In  facilitating  shipments,  therefore,  we 
are  not  doing  a  favor  to  Europe,  but  to  ourselves.  The 
Treasury,  indeed,  suspended  the  sale  of  bars  for  several 
years,  during  that  perilous  period  when  the  Government 
was  struggling  to  maintain  its  gold  reserves.  But  the 
situation  has  been  changed  by  the  enactment  of  the  Gold 
Standard  Law  of  1900,  and  the  breaking  of  the  endless 
chain  of  greenback  redemptions. 

The  Assay  Office  occupies  one  of  the  oldest  buildings 
in  "Wall  Street.  It  was  erected  in  1823,  and  was  for  many 
years  occupied  by  the  New  York  branch  of  the  United 
States  Bank.  After  that  it  was  leased  to  private  bankers, 
but  in  1853  was  purchased  by  the  Government  and  was 
first  occupied  by  the  Subtreasury.  What  is  now  the  Sub- 
treasury  building,  with  its  Greek  facade  and  its  eight  Doric 
columns,  was  built  by  the  Government  on  the  site  of  the 
old  Federal  Hall  for  the  Custom-House,  which  occupied  it 
until  1872,  when  that  branch  of  the  Government  was 
removed  to  the  Merchants'  Exchange  Building,  and  the 
Subtreasury  took  its  place.  It  is  one  of  the  most  impos- 
ing structures  in  ISTew  York,  and  no  other  is  so  rich  in 
historical  associations.  On  the  stone  steps  of  the  Sub- 
treasury  there  stands  a  statue  of  Washington,  in  com- 
memoration of  his  first  inauguration.  The  very  stone  on 
which  the  Father  of  his  Country  stood  on  that  occasion  is 
preserved  inside  the  building.  The  statue  was  unveiled  in 
1883  by  Governor  Grover  Cleveland,  and  President  Arthur 
and  George  William  Curtis  made  addresses.  Six  years  later 
the  Centennial  of  the  Inauguration  was  celebrated  there, 

& 

with  addresses  by  President  Harrison  and  Chauncey  M. 
Depew,  and  an  ode  by  Whittier.  Many  memorable  public 
meetings  have  been  held  in  front  of  the  Subtreasury,  and 
it  was  there,  in  IStfo,  during  the  excitement  that  followed 
the  news  of  Lincoln's  assassination,  that  James  A.  Garfield 
gave  utterance  to  the  ringing  sentence,  "  God  reigns  and 

the  Government  at  Washington  still  lives.'' 
10 


CHAPTEE  XVIII 

FOKEIGN  EXCHANGE  AND  THE  BALANCE  OF  TRADE 

SIMPLE  as  are  the  basic  principles  of  foreign  exchange, 
it  becomes  so  intricate  in  all  of  its  ramifications  over  an 
area  as  wide  as  the  world  itself,  and  involving  transactions 
as  great  as  the  volume  of  the  world's  commerce,  that  com- 
paratively few  have  a  complete  grasp  of  its  details.  Many 
experienced  bankers  even  are  unable  to  calculate  the  profit 
of  a  gold  shipment.  International  banking-houses  have 
difficulty  in  training  their  clerks  in  this  branch  of  their 
business.  The  young  men  can  be  taught  to  do  one  or  two 
routine  things,  but  as  for  any  large  comprehension  of  the 
subject,  that  seems  out  of  the  question.  The  writer  is 
informed  that  the  leading  experts  in  foreign  exchange  are 
men  trained  in  the  German  universities — a  fact  which  An- 
drew Carnegie  might  well  have  considered  before  assert- 
ing that  he  had  known  few  young  men  intended  for  busi- 
ness who  were  not  injured  by  a  collegiate  education. 

In  primitive  times  all  trade  was  a  matter  of  barter.  An 
ox  was  exchanged  for  a  horse,  a  camel  for  a  slave,  etc. 
Then  money  was  invented  as  a  medium  of  exchange.  The 
bill  of  exchange  was  another  step  in  advance.  It  became 
burdensome,  expensive,  and  perilous  to  transfer  a  sum 
of  money  over  a  considerable  distance  in  settlement  of 
every  transaction.  It  was  discovered  to  be  easier  and 
cheaper  to  make  such  settlements  by  transfers  of  credits. 
Thus  was  evolved  what  is  known  as  the  system  of  domestic 
and  foreign  exchange,  domestic  applying  to  exchanges 
224 


FOREIGN  EXCHANGE  AND  THE  BALANCE  OP  TRADE     225 

within  one's  own  country,  and  foreign  to  exchanges  with 
other  countries.  Foreign  exchange  is  more  complicated, 
because  each  country  has  a  different  coinage,  and  a  transac- 
tion in  foreign  exchange  therefore  involves  both  a  calcula- 
tion of  the  difference  between  coins  and  of  the  relative 
position  of  the  two  countries  as  regards  credit. 

Many  popular  misconceptions  exist  as  to  foreign  ex- 
change. A  common  misconception  is  that  it  means  simply 
an  exchange  of  the  coin  of  one  country  for  the  coin  of  an- 
other. It  does  mean  that,  but  it  means  much  more.  An 
exchange  of  coin  is  what  has  been  called  the  nominal  ex- 
change. Gold  is  the  basis  of  the  monetary  systems  of  both 
England  and  the  United  States,  but  the  dollar  is  the  basis 
of  the  latter's  coinage,  and  the  pound  of  England's  coinage. 
If  one  owed  a  debt  in  England  he  would  have  to  pay  in 
English  monev,  as  American  coin  is  not  legal  tender  there. 

O  v  *  " 

So  it  would  be  necessary  for  him  to  exchange  his  American 
dollars  for  English  pounds.  The  value  of  the  two  coins  in 
an  international  transaction  depends  not  upon  the  Govern- 
ment's stamp  upon  them,  but  upon  the  amount  of  gold  in 
them.  This  is  determined  by  an  assay.  The  equivalent  in 
American  money  of  £1  sterling  is  $4.8666.  But  in  paying 
a  debt  in  England  the  money  may  have  to  be  transported 
there.  This  involves  cost  of  freight,  insurance  against  loss, 
and  other  items  of  expense. 

The  actual  rate  of  exchange  depends  not  only  upon  the 
difference  in  the  value  of  the  coin,  but  upon  the  state  of  in- 
ternational credits.  For  the  real  exchange  is  the  payment 
of  a  debt  by  a  transfer  to  one's  creditor  of  a  debt  due  from 
another  person.  For  instance,  if  A  in  New  York  owes  B 
in  London  £5,000,  and  C.  also  in  London,  owes  A  a  like 
amount,  A  liquidates  his  indebtedness  by  transferring  to  B 
his  credit  with  C,  who  pays  the  money  to  B,  thus  avoiding 
two  shipments  across  the  Atlantic  from  C  to  A  and  from 
A  to  B.  Imagine,  if  one  can,  a  state  of  things  in  which 
every  international  debt  had  to  be  paid  by  an  actual  trans- 


225  THE  WORK  OF  WALL  STREET 

fer  of  coin.  Half  the  ships  would  be  carrying  merchandise 
and  the  other  half  gold  in  payment  therefor.  The  expense 
and  the  loss  would  be  prodigious.  Commerce,  of  course, 
would  be  impossible,  in  the  modern  sense.  But  by  bills  of 
exchange  this  is  obviated. 

Bills  of  exchange  are  written  orders  drawn  by  one  per- 
son on  another  who  owes  him  money,  generally  for  mer- 
chandise purchased  from  him,  directing  him  to  pay  a  speci- 
fied sum  at  a  specified  time  to  a  specified  person.  The  form 
of  a  bill  of  exchange  is  similar  to  that  of  a  draft,  the  differ- 
ence between  the  two  papers  being  that  the  draft  is  an 
order  generally,  not  on  a  debtor,  but  upon  a  bank  or  some 
other  custodian  of  funds  belonging  to  the  person  drawing 
the  draft.  Bills  of  exchange  are  negotiable,  being  trans- 

O  O  O 

ferable  by  indorsement  the  same  as  drafts  and  checks,  and 
increasing  in  strength  by  every  additional  indorsement. 
They  become,  therefore,  articles  of  merchandise  like  the 
products  whose  sale  produced  them.  Bills  of  exchange  are 
thus  bought  and  sold  like  wheat  or  cotton  or  stock. 

Europe  is  constantly  buying  American  products  and 
American  stocks,  and  as  the  United  States  is  always  pur- 
chasing European  cloths,  wines,  and  other  goods,  there  is 
never  a  time  when  one  country  has  not  debts  to  be  paid  in 
the  other.  There  is  therefore  a  constant  output  of  bills  of 
exchange  and  a  steady  demand  for  them.  Hence  has 
sprung  up  a  class  of  bankers  who  find  it  profitable  to  deal 
in  these  bills,  buying  from  some  and  selling  to  others.  The 
Chicago  merchant  who  sells  a  cargo  of  grain  in  England 
draws  a  bill  of  exchange  on  the  purchaser  in  London  and 
discounts  or  sells  it  at  a  bank.  The  merchant  in  Worth 
Street  having  purchased  a  line  of  English  cloth  in  London, 
may  buy  a  bill  of  exchange  to  pay  the  debt.  Some  bills  are 
drawn  to  be  paid  at  sight  on  demand,  and  others  at  sixty  or 
ninety  clays.  "When  made  payable  at  some  future  date,  the 
bill  must  be  presented  at  the  earliest  possible  time  to  the 
person  on  whom  it  is  drawn,  who  writes  "  Accepted  "  across 


FOREIGN  EXCHANGE  AND  THE  BALANCE  OF  TRADE    227 

its  face.  Naturally  the  value  of  a  bill  depends  upon  the 
names  on  it,  and  every  iudorser  becomes  responsible  for 
its  payment.  Bankers  also  draw  their  own  bills  on  their 
foreign  credits  and  sell  these  in  the  market. 

The  foreign  exchange  market  is  thus  a  vast  international 
clearing-house.  The  transactions  of  commerce  are  cleared 
by  this  system  of  transfers  of  credit  just  as  the  transactions 
of  inland  trade  are  cleared  by  the  bank  clearing-houses. 
If  our  indebtedness  abroad  is  heavy,  there  is  a  big  demand 
for  bills  and  the  rate  of  exchange  advances.  If  the  rate 
advances  to  a  certain  point,  however,  it  may  be  found 
cheaper  to  ship  gold  than  to  buy  the  bills.  If,  on  the  other 
hand,  the  balance  of  trade  is  in  our  favor,  and  the  vol- 
ume of  our  European  credits  is  greater  than  our  debts,  the 
supply  of  bills  is  larger  than  the  demand.  The  rate  there- 
fore falls,  and  if  it  falls  far  enough  gold  is  imported. 

"  It  might  seem,"  says  Jevons,  in  his  work  on  the  Mech- 
anism of  Exchange,  "  that  in  the  use  of  checks  internally 
and  of  bills  of  exchange  externally,  we  have  reached  the 
climax  of  economy  in  metallic  money,  but  there  is  yet  one 
further  step  to  take.  Let  us  imagine  that  merchants  all 
over  the  world  agree  to  keep  their  principal  accounts  with 
the  bankers  of  any  one  great  commercial  town.  All  their 
mutual  transactions  could  then  be  settled  among  those  bank- 
ers. An  approximation  to  such  a  state  of  things  exists  in 
the  tendency  to  make  London  the  monetary  headquarters 
of  the  commercial  world  and  the  general  clearing-house 
of  international  transactions." 

As  London  clears  for  the  world,  so  Xew  York  clears  for 
the  United  States.  The  bankers  of  Wall  Street  handle  the 
machinery  of  exchange  so  as  to  provide  with  the  utmost 
economy  of  time  and  expense  for  the  payment  of  our  in- 
debtedness abroad,  for  the  collection  of  our  foreign  credits, 
and  for  the  payment  of  the  expenses  of  American  tourists 
by  means  of  letters  of  credit,  and  all  the  other  functions  of 
international  finance. 


228  THE  WORK  OF  WALL  STREET 

But,  as  in  the  exchanges  of  a  clearing-house,  there  is 
always  a  balance  to  be  paid.  For,  of  course,  in  commer- 
cial intercourse  of  nation  with  nation,  it  can  not  be  supposed 
that  their  transactions  exactly  clear  each  other.  Foreign 
exchange  provides  a  convenient  method  by  which  we  pay 
for  foreign  merchandise  with  cotton  and  wheat  and  other 
American  products.  But  these  exchanges  are  not  equal, 
and  there  comes  a  time  when  balances  have  to  be  paid. 
These  balances  are  settled  in  gold.  If  it  is  a  credit  balance 
there  is  gold  to  receive.  If  it  is  a  debit  balance  there  is 
gold  to  pay.  In  clearing-houses  the  balances  are  paid  at 
stated  times,  usually  every  day.  But  in  foreign  exchange  the 
periods  of  payment  are  irregular  and  may  be  long  deferred. 

When  the  balance  has  to  be  paid  there  is  a  gold  ship- 
ment, for  gold,  not  valued  as  coin  but  as  bullion,  is  the  only 
thing  that  will  be  accepted  in  payment  of  an  international 
balance.  But  the  time  of  payment  is  regulated  by  various 
influences  which  often  appear  very  occult.  Gold  shipments 
are  controlled  by  the  rates  of  exchange,  but  these  rates  are 
controlled  by  the  supply  of  and  demand  for  bills.  This 
supply  and  demand  depend  on  the  state  of  trade  between 
the  United  States  and  Europe,  and  various  other  factors 
in  international  finance,  such  as  foreign  investment  and  for- 
eign travel. 

But  gold  shipments  are  also  regulated  by  another  power- 
ful influence,  namely,  the  rates  for  loans.  Money  always 
moves  to  the  point  where  there  is  the  most  profitable  use 
for  it,  where  the  rates  for  loans— the  matter  of  security 
being  equal — are  highest.  This  is  true  as  between  different 
parts  of  this  nation,  and  it  is  also  true  as  between  different 
countries.  In  one  sense,  there  are  no  boundary  lines  in 
finance  as  there  are  none  in  art.  London,  Paris,  Vienna, 
Berlin,  New  York — the  movement  of  money  between 
these  great  cities  is  controlled  by  laws  quite  distinct  from 
the  political  and  racial  barriers  that  separate  them.  There 
is  no  tariff  on  credits. 


FOREIGN  EXCHANGE  AND  THE  BALANCE  OF  TRADE     229 

If  the  rate  of  discount  is  higher  in  London  than  else- 
where, money  is  attracted  there  as  iron  to  a  magnet.  New 
York  may  owe  a  vast  sum  of  money  to  London,  but  an 
advance  in  interest  rates  in  Wall  Street  will  postpone  the 
payment,  for  London  may  find  it  more  profitable  to  lend 
the  money  here  than  to  call  it  home  where  there  is  less 
eager  demand  for  it.  A  few  months  ago  it  was  said  that 
Berlin  was  lending  money  in  New  York,  the  difference  in 
the  profit  of  employing  the  money  here  over  that  of  use  in 
Berlin  being  at  that  time  2  per  cent.  Therefore  the 
mechanism  of  foreign  exchanges  includes  within  it  this  sys- 
tem of  foreign  loans. 

Thus,  an  advance  in  rates  of  money  generally  weakens 
the  rates  of  exchange,  and  a  decline  in  money  strengthens 
the  exchange  market.  In  May,  1902,  to  take  an  illustration, 
the  foreign  exchange  situation  foreshadowed  gold  ship- 
ments as  the  rates  approached  closely  to  the  usual  export 
point.  But  by  reason  of  the  interior  demand  for  currency, 
and  an  expansion  of  loans  through  speculation  and  syndi- 
cate operations,  money  became  scarce,  and  the  rates  ad- 
vanced to  10  and  20  per  cent.  Immediately  there  was  an 
avalanche  of  sterling  loans.  Europe  found  it  more  profit- 
able to  loan  out  her  credits  in  Wall  Street  than  to  call 
for  payment.  Immediately  rates  of  exchange  fell  and  the 
stringency  in  money  was  reduced.  These  foreign  loans 
postpone  the  day  of  settlement  of  balances,  but  as  borrowed 
money  must  be  paid  back  some  time,  there  comes  a  day 
when  the  debit  balances  must  be  settled.  The  creditor 
finally  demands  his  money. 

Here  we  touch  upon  another  subject  concerning  which 
there  is  much  popular  misconception.  There  is  a  great 
deal  heard  about  the  "  balance  of  trade  "  as  being  in  favor 
of  one  country  or  another,  and  as  if  that  controlled  the 
movement  of  gold.  If  the  United  States  exports  more 
than  she  imports,  there  is  a  balance  in  her  favor,  and  if  other 
things  were  equal,  there  would  be  an  importation  of  gold. 


230  THE  WORK  OP  WALL  STREET 

But  the  exports  and  imports  of  merchandise  constitute  only 
one  item  in  the  international  balance-sheet. 

The  balance  of  trade  is  a  term  over  which  economists 
have  been  quarreling  for  two  hundred  years,  and  they  are 
still  at  it,  for  involved  in  it  is  the  issue  of  protection  and 
free  trade.  J.  B.  Say  says  that  a  misconception  on  this  sub- 
ject was  responsible  for  fifty  years  of  commercial  wars, 
which  were  carried  on  because  nations  thought  that  the  sole 
object  of  commerce  was  to  acquire  the  precious  metal. 
The  profits  of  commerce  were  valued  only  as  they  brought 
in  gold  and  silver.  If  one  nation  bought  more  than  it  sold 
of  merchandise,  it  had  to  pay  specie  for  the  balance,  and 
was  therefore  said  to  have  lost  wealth,  just  as  the  other 
nation,  which  had  sold  more  than  it  bought,  had  gained 
wealth.  The  idea  that  neither  side  lost  in  an  exchange  of 
commerce,  but  that  both  sides  gained,  was  overlooked,  and 
everything  was  sacrificed  in  an  endeavor  to  check  merchan- 
dise imports  and  force  exports. 

While  the  theory  of  the  balance  of  trade  no  longer  con- 
trols the  policies  of  the  nations  to  the  extent  it  once  did,  it 
still  has  a  powerful  sway,  and  to-day  an  exportation  of  gold 
is  regarded  by  multitudes  as  a  national  calamity,  as  being  a 
loss  of  national  wealth.  If  a  man  pays  $20,000  for  a  house  he 
is  no  poorer  than  he  was  before.  He  has  merely  exchanged 
one  article  of  value  for  another  article  of  value.  And  so  a 
shipment  of  gold  is  only  one  of  a  multitude  of  exchanges  of 
products  that  are  going  on  between  the  people  of  the  different 
nations.  Europe  loses  no  wealth  by  paying  gold  for  American 
wheat,  for  though  gold  perishes  not,  and  wheat  is  consumed, 
the  wheat  as  food  is  transformed  by  the  alchemy  of  the  stom- 
ach into  that  bodily  and  mental  strength  which  enables  Eu- 
rope not  only  to  live,  but  to  achieve  wealth  in  other  forms. 

In  Wall  Street,  however,  a  gold  shipment  is  dreaded, 
because  it  decreases  the  loaning  power  of  the  banks,  and 
therefore  what  is  called  the  balance  of  trade  is  constantly 
kept  track  of  as  far  as  it  is  possible  to  do  so. 


FOREIGN  EXCHAXGE  AND  THE  BALANCE  OF  TRADE    231 

But  even  "Wall  Street  is  prone  to  exaggerate  or  miscon- 
ceive the  significance  of  the  balance  of  trade.  In  the  fiscal 
year  ending  June  30,  1900,  the  total  foreign  commerce  of 
the  United  States  amounted  to  $2,244,424,266,  and  if  there 
had  been  no  mechanism  of  exchange,  this  business  would 
have  called  for  the  actual  transfer  between  the  United 
States  and  other  countries  of  that  amount  of  gold,  which 
would,  of  course,  have  been  a  physical  impossibility.  But 
by  the  use  of  bills  of  exchange,  the  great  bulk  of  the  trans- 
actions were  cleared  one  against  the  other,  so  that  the 
amount  of  gold  actually  required  to  be  exported  and 
imported  in  payment  of  balances  was  only  $02,839,943,  and 
this  in  settlement  of  financial  as  well  as  trade  balances.  In 
that  year  the  excess  of  merchandise  exports  over  imports 
amounted  to  $544,541,898.  If  the  movement  of  merchan- 
dise was  all  that  controlled  the  movement  of  gold,  there 
would  have  been  an  importation  of  just  that  amount  of  gold 
into  the  United  States  which  would  have  produced  a  panic 
in  Europe.  But,  as  a  matter  of  fact,  we  exported  $3,693,- 
575  more  gold  than  we  imported ;  in  other  words,  instead 
of  the  rest  of  the  world  being  indebted  to  the  United  States, 
as  the  trade  balance  indicated,  we  were  actually  in  debt, 
and  thus  exported  an  excess  of  gold.  In  the  next  fiscal 
year  of  1901  we  imported  an  excess  of  $12,866,010  gold, 
but  our  trade  balance  favored  us  to  the  amount  of  $664,- 
592,826.  In  the  past  eight  years  there  has  been  a  balance 
of  trade  in  our  favor  aggregating  more  than  $3,000,000,- 
000,  and  yet  the  excess  of  gold  imports  in  the  same  time 
was  considerably  less  than  $100,000,000.  It  is  therefore 
clear  that  the  movement  of  merchandise  between  this  and 
other  countries  constitutes  only  one  of  several  factors  con- 
trolling the  movement  of  gold. 

It  is  comparatively  easy  for  an  individual  to  ascertain 
whether  his  credits  exceed  his  debits  or  not,  but  it  is  often 
difficult  to  ascertain  the  true  position  of  a  nation.  Secretary 
Hay  has  been  quoted,  in  another  chapter,  as  declaring  that 


232  THE  WORK  OF  WALL  STREET 

in  the  past  five  years  the  United  States  has  become  a  cred- 
itor nation ;  but  certain  experts,  who  have  made  an  investi- 
gation, hold  to  the  contrary,  and  say  that,  while  the  United 
States  has  reduced  her  indebtedness  to  Europe,  she  is  still 
heavily  in  debt.*  It  may  seem  strange  that  there  should  be 
obscurity  on  so  vital  a  question  as  this,  but  the  fact  is  that 
while  we  have  official  Government  statistics  of  merchandise 
and  specie  exports  and  imports,  there  is  no  certain  way  of 
ascertaining  the  volume  of  other  international  transactions. 
Many  estimates  are  given,  but  they  are  merely  approxima- 
tions. Even  the  Government  statistics  of  value  of  mer- 
chandise imports  report  less  than  the  actual  value,  because 
a  large  though  uncertain  amount  of  imported  goods  is 
undervalued,  in  order  to  escape  payment  of  ad  valorem 
duties.  Still,  it  is  important  for  a  man  of  large  affairs  to 
keep  track  as  best  he  may  of  these  blind  items  in  the 
nation's  account  current  with  the  rest  of  the  world. 

Every  year  the  United  States,  to  mention  the  leading 
items,  has  to  pay  other  countries  : 

1.  For  her  importations  of  their  products. 

2.  The  freight  charges  on  merchandise  carried  in  foreign 
vessels  for  American  account. 


*  In  a  recent  address  to  the  .Manufacturers  Association  of  New  York, 
0.  P.  Austin,  Chief  of  the  United  States  Treasury  Bureau  of  Statistics, 
said :  "  The  fear  that  has  been  expressed  that  the  maintenance  of  a 
large  excess  of  exports  over  imports  would  disastrously  affect  national 
financial  balances  throughout  the  world  has  not  up  to  the  present  time 
been  realized,  and  under  present  conditions  does  not  seem  likely  to  be 
realized.  The  large  favorable  balance  of  trade  is  being  redistributed  to 
the  world,  partly  by  American  tourists,  partly  in  payment  of  freights  on 
international  commerce,  partly  in  payment  of  the  earnings  of  foreign 
capital  invested  in  the  United  States  and  interest  on  American  securities 
held  abroad,  and  partly  in  the  liquidation  of  those  securities ;  but  until 
that  foreign  indebtedness,  which  is  still  estimated  at  perhaps  $2.000,000,- 
000,  is  cancelled  and  the  United  States  becomes  a  creditor  instead  of  a 
debtor  nation,  there  seems  no  reason  to  suppose  that  a  continuation  of  a 
large  excess  of  exports  over  imports  will  prove  a  condition  to  be 
deprecated." 


FOREIGN  EXCHANGE  AND  THE  BALANCE  OP  TRADE     233 

3.  The  interest  and  dividends  on  American    securities 
owned  by  foreigners  or  by  Americans  making  their  homes 
abroad. 

4.  For  securities  sold  by  foreigners  in  our  markets. 

5.  The  traveling  expenses  of  American  tourists  in  for- 
eign countries. 

Every  year  the  United  States  is  due  to  receive  from 
other  countries : 

1.  The  sums  paid  for  our  agricultural  and  manufactured 
products  sold  abroad. 

2.  The  money  brought  by  immigrants. 

3.  The  outlays  of  foreign  vessels  in  our  ports. 

4.  The  traveling  expenses   of  foreign    tourists  in   our 
country. 

5.  The  freight  paid  for  merchandise  in  American  vessels 
in  the  foreign  trade. 

6.  The  sums  paid  for  purchase  of  American  securities 
and  other  American  investments. 

AVhile  Europe  is  vastly  our  debtor  in  the  exchange  of 
products,  we  are  vastly  her  debtor  on  all  the  other  items  of 
the  international  balances.  For  instance,  nearly  all  of  our 
commerce  is  carried  by  foreign  vessels.  In  1901,  only  12 
per  cent  of  all  the  imports  and  6  per  cent  of  the  exports 
were  carried  in  vessels  flying  the  United  States  flag.  There- 
fore we  have  to  pay  other  countries  for  carrying  our  com- 
merce. Then,  the  United  States  is  a  nation  of  tourists. 
In  the  fiscal  year  of  1900,  675,025  passengers  arrived  in 
the  United  States  from  other  countries,  but  157,050  of 
these  were  United  States  citizens  returning  from  travel 
abroad ;  only  30,057  were  foreign  tourists  and  business 
agents  intending  to  travel  in  the  United  States  ;  the  rest, 
4S7,91S,  were  immigrants.  The  amounts  paid  by  Amer- 
icans abroad  are  largely  in  excess  of  the  sums  paid  here 
by  foreign  tourists  and  brought  here  by  immigrants.  Sev- 
eral years  ago  William  Dodsworth  made  a  painstaking 
effort  to  arrive  at  a  just  estimate  of  the  various  un- 


234  THE  WORK  OF  WALL  STREET 

known  quantities  in  the  problem  of  the  balance  of  trade. 
He  computed  the  debtor  items  as  follows :  Investment 
account,  $90,000,000;  traveling  credits,  $47,000,000; 
inward  freight  charges  for  American  vessels,  $24,777,- 
000 ;  outward  passenger  fares  per  foreign  steamships, 
$8,698,000 ;  undervaluations  of  imports,  $5,000,000 ;  total, 
$175,475,000.  The  creditor  items  were:  Money  brought 
by  immigrants,  $14,000,000 ;  outlays  of  foreign  ships  in 
ports,  $8,250,000 ;  port  outlays  of  passenger  steamships, 
$6,600,000  ;  outward  earnings  of  American  vessels,  $1,900,- 
000;  total,  $29,750,000.  The  debtor  balance  was  $145,- 
725,000,  outside  of  the  movement  of  merchandise  and  of 
securities.  During  the  seven  years  from  1887  to  1893  the 
excess  of  merchandise  and  specie  exports  was  $524,000,000  ; 
and  the  debtor  balance  on  the  other  items  was  $1,015,000,- 
000,  leaving  a  debtor  balance  of  $491,000,000,  which  was 
presumably  settled  by  transmission  of  securities.  Since 
this  estimate  was  made,  no  other,  so  far  as  the  writer  knows, 
has  been  attempted  with  anything  like  the  same  thorough- 
ness. Allowing  for,  say,  about  10  per  cent  increase  in  the 
various  items  forming  the  basis  of  this  computation,  it 
might  be  possible  to  make  this  estimate  the  foundation  of  a 
fair  calculation  for  the  current  year. 

But  enough  has  been  written  to  indicate  the  laws  that 
control  the  movement  of  gold  in  settlements  of  international 
balances.  The  gold,  however,  is  not  always  shipped  directly 
to  the  country  to  which  we  owe  it.  For  instance,  we  may 
be  indebted  to  Germany,  but  ship  to  France,  because  Ger- 
many owes  a  balance  to  that  country,  and  a  shipment  to 
France  thus  satisfies  two  debts  at  once.  Or  we  may  owe 
England,  but  ship  to  France,  because  England  is  willing  to 
lend  the  money  there.  Thus  we  hear  of  a  "  triangular 
transaction  "  in  exchange,  which  is  a  .movement  involving 
three  countries. 

The  shipper  of  gold  has  a  comparatively  simple  problem 
to  solve.  He  treats  crold  as  an  article  of  merchandise.  lie 


FOREIGN  EXCHANGE  AND  THE  BALANCE  OF  TRADE    235 

ascertains  what  it  costs  him  in  Xew  York ;  what  will  be 
the  expense  of  packing,  of  carting  to  the  steamship  wharf, 
of  transporting  to  Europe,  of  insuring  against  loss ;  what 
will  be  the  loss  of  interest  in  transit,  etc. ;  and  then  he 
ascertains  what  he  can  sell  the  gold  for  in  London  or  Paris, 
as  the  case  may  be.  If  there  is  a  profit,  the  gold  is  shipped. 
A  profit  of  $200  on  a  shipment  of  $1,000,000  has  been 
said  to  influence  a  shipment.  Sometimes,  when  there  is 
not  a  legitimate  profit  in  gold  exports,  they  may  be  forced 
by  an  offer  of  some  premium  or  extra  inducement,  for,  as 
has  been  indicated,  gold  moves  to  the  point  where  it  is  most 
wanted.  Of  course,  the  same  rules  that  regulate  gold 
exports  apply  to  gold  imports. 

One  of  the  largest  of  recent  shippers  of  gold  has  fur- 
nished the  author  with  a  statement  of  the  method  of  calcu- 
lating the  profit  or  otherwise  of  a  shipment  to  Paris. 

If  foreign  exchange,  he  says,  rises  to  a  certain  point,  it 
becomes  more  profitable  to  remit  gold  (which  has  a  fixed 
price  in  most  of  the  principal  countries)  to  meet  obligations 
than  to  remit  exchange.  On  the  other  hand,  if  exchange 
declines  to  a  certain  point,  it  may  become  preferable  to 
import  gold  than  to  draw  exchange  against  credit  balances 
abroad.  Taking  for  example  a  gold  shipment  to  Paris, 
it  has  to  be  taken  into  calculation  that  the  Bank  of  France 
pays  3,437  francs  for  1  kilo  fine  gold,  and  that  the  United 
States  Assay  Office  sells  bar  gold  at  the  price  of  $20. 07183 
per  ounce  fine  plus  40  cents  per  81,000  premium.  As  1 
ounce  is  equal  to  31.1035  grammes,  $1  bar  gold  would  bring 
in  Paris  .5.16036  francs.  '  Deducting  about  $-2  per  $1,000 
expenses,  the  net  receipt  in  Paris  for  $1  bar  gold  would 
be  about  5.1590  francs.  It  therefore  results  that  if  ex- 
change in  Xew  York  is  such  that  less  than  5.1590  francs 
can  be  obtained  for  $1,  it  is  cheaper  to  ship  gold  than  to 
remit  exchange. 

This  is  of  value  as  being  the  calculation  of  a  practical 
man  trained  in  foreign  exchange,  and  not  of  a  mere  theo- 


236  THE   WORK  OF  WALL  STREET 

rist.  Formerly  most  of  the  gold  exported  was  in  coin,  which 
was  transported  in  bags.*  But  considerable  value  was  lost 
by  abrasion,  and  an  allowance  had  to  be  made  for  this  in  all 
calculations.  For  a  number  of  years  the  United  States 
would  not  sell  the  gold  in  bars,  but  now  supplies  bars  at  the 
Assay  Office  at  a  slight  premium.  The  shipper  packs  them 
in  the  rear  court  of  the  Assay  Office  in  casks,  with  sawdust 
to  prevent  abrasion. 

Sterling  loans  are  loans  made  on  bills  of  exchange. 


*  The  following  calculation  of  a  gold  shipment  to  London  based  on 
coin  (American  eagles)  is  taken  from  The  Journal  of  Commerce  and 
Commercial  Bulletin  of  recent  date : 

"  An  American  eagle  weighs  258  grains  or  .5375  oz.  troy.  In  $1,000,000 
worth  of  eagles,  therefore,  of  exactly  full  weight,  there  would  be 
53,750  ozs.  The  Bank  of  England  will  buy  American  eagles  at  a  fixed 
rate  of  76s.  4^d.  per  oz.  (sometimes  a  little  more).  At  that  rate  53,750 
ozs.  of  eagles  (allowing  nothing  for  abrasion)  would  yield  £205.201. 
The  charges  on  a  shipment  of  gold  to  London  vary  with  each  shipper 
and  these  are  trade  secrets  which  are  jealously  guarded.  In  a  rough 
way,  however,  it  costs  about  $3,000,  or  £000,  to  ship  $1,000.000  gold 
to  London.  The  following  formula  shows  roughly  the  result  of  a  ship- 
ment of  $1,000,000  of  eagles  of  exactly  full  weight: 

"  $1,000,000—53,750  ozs.— which  yield £205,201 

Charges — 

Freight,  -fs  of  1  per  cent £317 

Insurance,  -^  of  1  per  cent 93 

Interest,  10  days,  at  say  3  per  cent 171 

Cartage,  cooperage,  say  $100,  or 20 

Total £601—      601 

Net  yield  of  shipment £204:600 

"  A  shipment  of  $1.000.000  eagles  on  the  above  basis,  then,  will  realize 
£204.600  net.  This  means  that  every  pound  sterling  costs  (1,000,000 
divided  by  204,600)  $4.8875.  If  this  were  all  the  story,  then,  so  long  as 
demand  sterling  could  be  bought  at  le^s  than  $4.8875,  there  would  bo  no 
inducement  to  ship  gold. 

"But  owing  to  the  so-called  'triangular'  operation,  or  to  special  con- 
cessions offered  by  the  receiver  of  the  gold,  it  is  often  practicable  to  ship 
gold  to  Europe  when  demand  sterling  is  selling  below  $4.8875,  or  even 
below  $4.88," 


FOREIGN  EXCHANGE  AND  THE  BALANCE  OF  TRADE    237 

The  object  of  making  sterling  loans  is  to  obtain  money 
on  time  at  a  cheaper  rate  than  the  one  ruling  in  the  do- 
mestic markets.  The  modus  operandi  is  as  follows  : 

The  banker  draws  sixty-  or  ninety -days  sight  bills  on 
London,  which  he  either  hands  over  to  the  borrower,  in- 
dorsed in  blank,  who  then  sells  them  in  the  market,  or  he 
himself  sells  them  in  the  market  on  behalf  of  the  borrower, 
to  whom  he  delivers  the  proceeds.  After  the  lapse  of  sixty 
or  ninety  days  the  borrower  has  to  repay  to  the  banker  the 
loan  at  the  current  rate  of  sterling  exchange.  If  the  bor- 
rower wishes  to  calculate  what  rate  of  interest  the  money 
will  cost  him,  he  has  to  figure  as  follows.  As  an  example 
we  will  take  a  sterling  loan  of  £10,000  for  ninety  days  : 

If  the  rate  of  exchange  obtained  for  the  bills  was 
484  (for  £1)  net,  i.  e.,  free  of  brokerage  and 
revenue  stamp,  the  borrower  would  receive .  . .  $48,400 

Of  this  he  has  to  pay  the  banker  say  ^  per  cent 

commission 242 


Making  the  net  proceeds $48,158 

If  the  rate  of  exchange  at  which  the  borrower  has  to 
repay  the  banker  were  486-J-,  he  would  have  to  pay  $48,650 
for  the  original  loan  of  $48,158,  so  that  the  result  is  that  he 
pays  for  interest  $492,  which  is  equal  to  4  per  cent  per 
annum. 


CHAPTER  XIX 

PEIVATE    BANKERS    AND    UNDERWRITING    SYNDICATES 

IT  lias  been  said  that  no  European  nation  could  go  to 
war  without  first  consulting  the  Rothschilds,  so  dependent 
are  all  governments  on  the  money  power  in  times  of  na- 
tional crises,  when  the  ordinary  revenues  are  insufficient 
and  extraordinary  loans  are  required.  The  bankers  then 
are  called  upon  to  supply  the  "  sinews  of  war." 

When  we  speak  in  Wall  Street  of  the  "  private  bankers," 
we  refer  to  the  handful  of  great  banking-houses  whose  opera- 
tions are  on  an  international  scale,  and  which  in  the  United 
States  represent  the  same  power  that  the  Rothschilds  have 
so  long  possessed  in  Europe.  These  houses  may,  like  J.  P. 
Morgan  &  Company,  be  closely  allied  by  partnership  ties 
to  other  powerful  firms  in  London  and  Philadelphia ;  or 
else  represent  here  the  great  banking  firms  and  institutions 
of  Europe,  just  as  August  Belmont  &  Company  represent 
the  Rothschilds. 

The  private  bankers  transact  a  general  banking  business 
much  the  same  as  the  incorporated  banks  do,  but  free  from 
many  of  their  limitations.  They  make  call  and  time  loans, 
buy  and  sell  mercantile  paper,  and  engage  extensively  in  all 
foreign  exchange  operations.  They  act  as  fiscal  agents  for 
corporations  and  associations.  They  are  dealers  in  invest- 
ment securities.  They  often  conduct  important  operations 
in  the  stock-market.  They  underwrite  new  issues  of  stocks 
and  bonds  for  railroad  and  other  corporations.  They  un- 
dertake the  reorganization  of  insolvent  or  embaiTassed  rail- 
roads. Of  recent  years  they  have  been  especially  promi- 
nent in  the  promotion  of  immense  industrial  companies,  or, 
238 


PRIVATE  BANKERS  AND  UNDERWRITING  SYNDICATES  239 

in  popular  nomenclature,  trusts.  They  are  at  once  bankers, 
brokers,  dealers  in  foreign  exchange,  promoters,  organizers, 
and  underwriters.  Their  methods  of  business  differ  little,  if 
any,  from  those  already  described.  The  main  difference 
lies  in  the  scope  and  magnitude  of  their  transactions. 

Their  field  of  operations  is  as  wide  as  the  world.  Their 
business  is  in  London  and  Paris  and  Berlin  almost  as  much 
as  it  is  in  New  York.  This  is  especially  true  in  recent 
years,  when  the  expanding  commerce  and  financial  power  of 
the  United  States  have  placed  this  country  in  the  company 
of  the  world's  "great  powers,"  a  competitor  of  Great  Brit- 
ain and  Germany,  and  a  factor  in  the  now  pressing  problem 
of  the  Orient.  The  private  bankers  are  the  powers  "  be- 
hind the  throne"  in  the  railroad  and  the  big  industrial 
corporations  which  now  practically  control  the  principal 
branches  of  trade.  When  it  is  said  that  one  banking-house 
in  Wall  Street  either  controls  or  is  directly  influential  in 
the  management  of  railroads  having  a  mileage  of  more  than 
fifty-seven  thousand,  which  is  over  one-fourth  of  the  entire 
railroad  mileage  of  the  United  States  ;  that  it  practically 
controls  one,  and  is  represented  in  the  Boards  of  Directors 
of  the  other  two,  of  the  three  greatest  banks ;  that  it  is 
identified  with  three  trust  companies  and  one  of  the  four 
leading  insurance  companies ;  that  it  is  the  chief  directing 
force  in  the  coal  and  iron  trade,  and  has  close  alliances  with 
leading  corporations  in  copper,  express,  telegraph,  and  elec- 
tric light ;  and  that  the  par  value  of  the  securities  of  the 
various  companies  with  which  it  is  closely  identified  is  up- 
ward of  $5,000,000,000,  or  nearly  one-third  of  all  the  se- 
curities dealt  in  in  the  listed  and  unlisted  departments  of 
the  Stock  Exchange,  some  idea  is  formed  of  the  magnitude 
of  the  operations  and  the  extent  of  the  power  of  the  private 
bankers  of  Wall  Street. 

Mr.  Morgan  is  the  only  man  in  the  world  thus  far  to 
deal  in  billions  of  dollars,  his  organization  of  the  United 

o 

States  Steel  Corporation  being  the  crowning  achievement 
17 


240  THE  WORK  OF  WALL  STREET 

of  Wall  Street  finance,  as  he  himself  may  fairly  be  said  to 
be  the  greatest  personal  product  of  the  Street.  Mr.  Mor- 
gan's own  account  of  the  business  of  the  private  banker  is 
therefore  of  supreme  interest,  it  being  the  account  of  an 
expert.  In  his  testimony  of  March,  1002,  before  the  spe- 
cial examiner  in  the  suit  against  the  Northern  Securities 
Company,  the  following  dialogue  *  took  place  between  him 
and  the  lawyer  examining  him  : 

Q.  You  are  J.  P.  Morgan,  senior  member  of  the  firm 
of  J.  P.  Morgan  &  Company  ?  A.  Yes. 

Q.  Would  you  mind  telling  us  the  nature  of  the  trans- 
actions of  J.  P.  Morgan  &  Company  ?  A.  We  deal  in  rail- 
road securities  and  other  securities  and  adjustments — any- 
thing in  the  financial  line  that  is  creditable  and  might  sug- 
gest itself  to  the  firm  as  profitable. 

Q.  Does  the  firm  ever  engage  in  any  speculation  on  its 
own  account  ?  A.  Not  to  any  extent. 

Q.  They  would  not,  for  instance,  purchase  $78,000,000 
of  stock  of  a  railroad  for  their  own  account  ?  A.  Probably 
not.  We  might  if  we  thought  it  desirable. 

Q.  Their  business  is  to  deal  in  stocks  and  other  securi- 
ties for  the  benefit  of  their  customers  ?  A.  Yes. 

Q.  And  then  by  financing  any  good  enterprises  that 
might  present  themselves  ?  A.  If  they  wished  to  do  that. 

Q.  And  they  would,  for  instance,  loan  money  for  that 
purpose  ?  A.  Yes. 

Q.  For  their  own  account  or  the  account  of  others  ? 
A.  I  don't  feel  that  I  ought  to  be  called  on  to  answer  that 

o 

question. 

Q.  The  relations  of  your  firm  as  bankers  to  the  North- 
ern Pacific  have  continued  since  1890?  A.  Yes,  we  have 
been  their  fiscal  agents. 

Q.  To  save  time,  tell  us  what  that  means — what  you  did 
for  them.  A.  Whatever  they  required  in  a  financial  way. 

*  Report  of  testimony  in  the  Xew  York  Tribune. 


PRIVATE  BANKERS  AND  UNDERWRITING  SYNDICATES  2il 

Q.  You  mean  to  say  that  all  their  financial  business 
was  conducted  through  your  house  ?  A.  No,  we  were  their 
New  York  representatives,  and  we  are  to-day. 

Q.  So  that  if  the  Northern  Pacific  issued  any  new  stock 
since  that  time  it  would  be  financed  through  your  house  ? 
A.  It  would.  At  least,  I  should  expect  it. 

Q.  And  if  it  was  necessary  to  raise  money  for  the  build- 
ing of  extensions  and  improvements,  or  for  the  purchase  of 
large  lines,  these  transactions  would  probably  be  financed 
through  your  house  ?  A.  I  would  expect  them  to  be. 

Q.  Of  course,  the  detail  financial  matters  of  the  road 
would  be  handled  by  others  ?  A.  Of  course. 

Q.  But  all  these  large  matters  would  be  handled  by 
your  house  ?  A.  I  should  so  expect  them  to  be. 

Q.  And  the  Northern  Pacific  has  from  time  to  time 
paid  for  this  service  ?  A.  I  think  so. 

Q.  Every  time  an  underwriter's  syndicate  is  formed 
there  is  a  commission  paid  to  the  banker  and  some  profit  to 
the  underwriter  ?  A.  Not  always.  (Laughter.) 

Q.  That  is  the  usual  custom  ?  A.  We  should  expect  it 
to  be.  Otherwise  the  transaction  would  not  be  made. 

Q.  You  would  expect  to  be  paid  for  your  services  ? 
A.  Not  always. 

Q.  When  you  negotiate  for  a  railroad  don't  you  make 
it  pay  you  ?  A.  Not  always. 

Q.  You  sometimes  do  it  without  any  consideration  ? 
A.  We  do.  It  may  not  be  desirable  to  make  a  charge.  It 
depends  on  the  nature  of  the  transaction.  In  a  great  many 
cases  no  charge  whatever  is  made. 

Q.  You  do  that  work  for  nothing  ?  A.  We  do  it  for 
nothing. 

The  international  banking-houses  touch  business  at  every 
possible  point  of  contact.  It  may  almost  be  said  that  they 
are  the  arbitrators  in  every  trade,  and  that  they  can  say  the 
word  which  makes  for  industrial  war  or  peace.  They  settle 


242  THE  WORK  OP  WALL  STREET 

rate  wars  and  labor  strikes.  They  shape,  subject  to  the 
same  natural  laws  which  govern  all  human  beings,  the  des- 
tinies of  the  markets.  When  two  of  the  great  banking- 
houses  clash,  the  result  is  like  the  eruption  of  Mont  Pelee  or 
a  collision  between  two  planets.  Such  a  clash  shook  Wall 
Street  from  top  to  bottom  in  the  memorable  panic  of  May, 
1901.  Upon  the  consummate  ability  and  integrity  of  these 
bankers  depend  in  large  measure  the  growth,  the  stability, 
the  prosperity,  and  the  happiness  of  the  country.  Before 
them  we  stand  in  the  presence  of  what  is  called  "  high 
finance."  On  important  occasions,  when  a  public  statement 
is  expected  from  J.  P.  Morgan  &  Company,  a  throng  of 
brokers  and  reporters  gather  around  the  doors  of  the  firm, 
anxious  to  get  the  earliest  possible  information.  A  meeting 
of  the  Cabinet  at  Washington  does  not  excite  more  interest 
than  a  "  conference  at  Morgan's." 

There  is  one  special  function  of  the  private  bankers 
which  needs  explanation.  They  underwrite  new  issues  of 
securities  either  by  established  corporations  or  by  newly 
organized  companies.  To  underwrite  is  to  insure.  A  com- 
pany desires  to  raise,  say,  $50,000,000,  and,  to  do  this,  issues 
bonds  secured  by  a  mortgage  on  its  property.  It  possesses 
no  facilities  for  selling  these  bonds  to  the  public  It  must 
place  the  bonds,  or  float  the  loan,  as  the  phrase  is,  through 
a  banking-house,  which  either  underwrites  the  issue  itself  or, 
if  it  is  too  large  for  its  own  resources,  forms  an  underwrit- 
ing syndicate.  A  syndicate  is  a  combination  of  capitalists 
united  for  the  purpose  of  prosecuting  an  enterprise  requiring 
a  large  amount  of  money.  The  underwriters  agree  to  take 
the  entire  issue  of  securities;  that  is  to  say,  they  insure  it,  being 
prepared  to  pay  for  every  bond  that  is  not  sold  to  the  public. 

It  is  scarcely  necessary  to  say  that  this  is  an  operation 
often  involving:  sreat  risks.  The  underwriters  must  be 

O       c3 

men  of  large  capital,  extensive  resources,  wide  and  influen- 
tial connections,  and  thorough  understanding  of  the  markets. 
Nothing  is  more  important   in   issuing  new  securities 


PRIVATE  BANKERS  AND  UNDERWRITING  SYNDICATES  243 

than  to  know  when  is  the  best  time  to  issue  them.  If  the 
market  is  flooded  with  new  securities,  if  there  has  been 
an  overproduction  of  stocks  and  bonds,  if  the  demand  is 
sluggish  and  prices  are  declining,  the  time  is  unpropitious 
for  a  new  issue.  It  has  been  said  that  only  once  in  a 
generation  would  a  combination  of  conditions  exist  favor- 
able to  such  a  stupendous  enterprise  as  the  organization  of 
the  United  States  Steel  Corporation. 

Numerous  underwriting  syndicates  are  formed  com- 
posed of  weak  material,  and  managed  by  adventurers  in 
finance  who  have  little  to  lose  and  much  to  gain.  These 
are  generally  unable  to  carry  the  enterprises  they  have 
undertaken  to  insure,  and  the  result  is  a  crash  in  which 
many  innocent  victims  suffer. 

Allusion  has  been  made  to  the  United  States  Steel  Cor- 
poration. A  syndicate  was  formed  to  underwrite  this.  It 
was  estimated  that  it  might  require  $200,000,000  to  float 
the  huge  company.  The  syndicate  pledged  itself  to  furnish 
that  sum.  A  first  instalment  of  $25,000,000  was  called, 
and  paid  in  to  the  managers  of  the  syndicate.  ISTo  official 
statement  is  made  to  the  public  of  such  operations.  They 
are  considered  private  business,  and  even  subscribers  to  a 
syndicate  may  know  little  about  its  affairs  beyond  the  fact 
that  they  put  in  so  much  money  and  draw  out  so  much 
profit.  But  it  has  been  announced  that  in  the  case  of  the 
Steel  syndicate  it  was  so  successful  that  not  only  was 
$25,000,000  all  that  was  necessary  to  be  paid  in  of  the 
$2<>o,00o,000  pledged,  but  that  this  sum  has  already  been 
paid  back  to  the  subscribers;  and  in  addition  $20,000,000 
profits,  which  is  lo  per  cent  on  the  amount  pledged  and  80 
per  cent  on  the  amount  actually  invested.  Moreover,  it  is 
said  that  further  dividends  are  to  be  declared,  so  that 
the  subscribers  to  the  syndicate  will  finally  receive  a  sum 
equal  to  20  per  cent  on  the  amount  pledged,  1<»0  per  cent 
on  the  amount  actually  invested,  and  about  4  per  cent  on 
the  par  value  of  the  stock  floated. 


244  THE   WORK   OP  WALL  STREET 

Great  as  are  the  profits,  they  are  generally  no  greater 
than  the  risks  involved.  The  United  States  Steel  Corpora- 
tion recently  determined  to  retire  $200,000,000  of  preferred 
stock  and  issue  $250,000,000  of  bonds  in  its  place.  It  was 
announced  that  the  underwriting  syndicate  would  guarantee 
$100,000,000  for  this  operation  and  receive  4  per  cent  com- 
mission on  the  amount  of  the  bonds  actually  placed.  The 
syndicate  would  thus  have  a  prospective  profit  of  $10,000,- 
000  if  the  entire  issue  should  be  sold,  and  one-fourth  of  this, 
or  $2,500,000,  would  go  to  the  banking-house  managing  the 
syndicate. 

The  general  rule  governing  the  underwriting  of  new 
securities  is  that  the  syndicates  shall  receive  a  commission 
of  5  per  cent  on  the  value  of  the  securities  underwritten. 
Let  us  return  to  the  illustration  of  a  railroad  issuing  $50,- 
000,000  of  bonds.  The  railroad,  it  may  be  presumed,  is  of 
good  standing,  and  the  security  excellent.  The  company 
prefers,  instead  of  securing  a  high  premium  on  the  bond, 
to  save  in  the  annual  interest  charges.  So  it  issues  a  3|- 
per-cent  bond,  with  the  probability  that  it  will  sell  at  par 
or  perhaps  higher.  The  underwriters  agree  to  take  the 
entire  issue,  say,  at  98,  but  it  charges  a  commission  of  5  per 
cent,  or  about  $2,500,000,  for  the  labor,  expense,  and  risk 
attending  the  operation.  The  railroad  is  now  secure.  It  is 
assured  of  the  money  it  needs,  for  which  it  has,  indeed, 
paid  a  liberal  discount,  but  no  more  liberal  proportionately 
than  would  be  required  in  procuring  a  modest  loan  in  the 
ordinary  market  channels.  The  syndicate  must  now  sell 
the  bonds.  If  there  is  an  active  investment  demand  it  may 
be  able  to  accomplish  this  at  once,  at  a  considerable  advance 
over  the  underwritten  price  of  98.  Suppose  it  sells  at  102, 
the  syndicate  would  then  reap  a  profit  of  4  per  cent,  or 
$2,000,000  in  addition  to  the  commission  of  $2,500,000, 
less,  however,  the  cost  of  advertising,  wages,  attorneys' 
fees,  and  other  expenses.  But  if  the  demand  was  not  as 
great  as  had  been  anticipated,  the  syndicate  might  find  itself 


PRIVATE  BANKERS  AND  UNDERWRITING  SYNDICATES  245 

with  millions  of  dollars  of  securities  on  its  hands,  for  which 
it  must  pay,  but  for  which  there  is  no  adequate  market. 

In  large  operations  the  underwriting  syndicate  often 
forms  a  subsyndicate,  or  practically  a  blind  pool,  the  mem- 
bers of  which  take  a  certain  part  of  the  risk  involved,  with 
a  right  to  a  proportionate  share  in  the  profit,  less  a  usual 
commission  of  5  per  cent  to  the  managers.  It  is  through 
some  such  arrangements  as  these  that  great  companies  are 
formed,  big  loans  floated,  reorganizations  and  consolidations 
effected,  and  immense  enterprises  made  possible. 

There  has  been  much  said  in  criticism  of  the  sums  paid 
to  bankers  and  syndicates  as  commissions  for  the  marketing 
of  securities  for  corporations.  But  the  risk  is  often  as  great 
as  the  possible  profit,  and  in  other  cases  where  there  is  a 
minimum  of  risk,  coupled  with  a  maximum  of  profit,  the 
charge  made  by  the  banker  corresponds  in  a  measure  to 
the  fee  of  the  great  specialist  in  surgery,  who  may  charge 
$5,000  for  an  operation  taking  only  five  minutes  and  involv- 
ing no  special  labor  to  himself.  But  the  patient  pays  not 
for  the  time  and  labor  of  the  surgeon,  but  for  his  years  of 
training  and  superior  skill  and  knowledge.  So  in  finance ; 
if  the  corporation  desires  the  services  of  the  great  specialist, 
it  must  be  willing  to  pay  the  price  demanded. 

In  some  cases  the  underwriting  syndicate  is  paid  wholly 
in  stock ;  for  instance,  in  the  underwriting  of  the  securities 
of  the  new  shipping  trust  it  was  reported  that  the  syndicate 
would  receive  in  stock  an  amount  equal  to  55  per  cent  of 
$50,000,000  of  bonds  it  would  guarantee. 

In  nearly  all  syndicate  operations,  especially  when  the 
formation  of  a  new  company,  or  the  reorganization  of  an 
old  one,  is  involved,  the  services  of  a  legal  adviser  are 
required.  The  corporation  lawyer  is  thus  one  of  the 
important  adjuncts  of  a  private  banking-house,  and  some- 
times he  is  even  made  one  of  the  partners. 


CHAPTEK  XX 

PANICS 

BOKN  in  a  boom  and  cradled  in  a  panic,  the  history  of 
the  stock-market  lias  been  that  of  an  alternation  of  booms 
and  panics.  The  order  of  events  is  this :  There  is  first  a 
period  of  prosperity  in  business,  based  on  good  crops  and  a 
sound  condition  of  the  markets.  Confidence  prevails,  credit 
is  excellent,  manufactures  flourish,  new  enterprises  are 
encouraged,  expansion  sets  in.  This  induces  an  active 
speculation.  The  people  are  prosperous,  and  they  are  led  to 
invest  a  part  of  their  surplus  earnings  in  stocks.  The  pub- 
lic takes  possession  of  Wall  Street.  The  volume  of  Stock- 
Exchange  transactions  increases.  Prices  advance  by  leaps 
and  bounds.  'New  issues  of  securities  are  absorbed  quickly. 
There  seems  to  be  no  limit  to  the  upward  movement. 
Then  overspeculation  and  its  attendant  evils  follow.  Credit 
is  unduly  expanded.  Recklessness  and  dishonesty  corrupt 
the  markets.  Suddenly  some  event  unforeseen,  except,  it 
may  be,  by  the  most  experienced  eyes,  takes  place.  It 
comes  in  the  form  of  a  calamity.  It  strikes  the  stock- 
market  when  its  resources  are  expanded  to  the  utmost.  The 
inflated  values  collapse  like  a  punctured  balloon.  Panic 
seizes  the  Street.  Credit  is  withdrawn.  Money  is  hoarded. 
The  banks  contract  their  loans,  forced  liquidation  sets  in, 
weak  houses  are  driven  to  the  wall,  failures  are  announced, 
general  bankruptcy  is  threatened,  the  Clearing-IIouse  is 
obliged  to  issue  loan  certificates  for  the  protection  of  sol- 
vent firms  temporarily  embarrassed,  mills  and  factories  close 
240 


PANICS  247 

their  doors,  thousands  of  laborers  are  thrown  out  of  work, 
and  distress  is  universal.  After  this  follows  a  long  period 
of  stagnation,  from  which  the  country  and  the  Street, 
slowly  and  painfully,  emerge  into  a  new  era  of  good  times. 

A  boom  is  a  prolonged  bull  movement.  A  panic  is  a 
convulsion  in  the  markets,  causing  a  contraction  of  credits, 
a  collapse  in  prices  and  failures  in  business.  A  distinction, 
however,  needs  to  be  made  here.  The  word  panic  is  over- 
worked like  many  other  words.  It  is  commonly  used  to 
describe  two  very  different  things.  Thus,  we  speak  of  the 
panic  of  1893,  and  of  the  Venezuelan  panic  of  December 
19,  1895.  But  the  former  was  a  prolonged  commercial 
crisis,  involving  the  business  of  the  whole  country,  the  bale- 
ful effects  of  which  were  felt  for  years.  The  latter  was  a 
sudden  paroxysm  of  fear,  involving  a  crash  in  the  stock- 
market,  but  scarcely  felt  outside  of  Wall  Street,  and  which 
lasted  only  a  day  or  two.  Prof.  W.  G.  Sumner  speaks  of  a 
panic  as  "a  wave  of  emotion,  apprehension,  and  alarm  which 
is  more  or  less  irrational."  Such  was  the  Venezuelan  panic. 
It  was  produced  by  fear  of  war  with  England.  The  fear 
was  caused  by  a  sentence  in  President  Cleveland's  message. 
The  war  never  broke  out  and  the  fear  of  it  passed  quickly 
away. 

There  have  been  eight  commercial  crises,  involving 
practically  the  whole  country,  since  1812,  or  an  average  of 
one  every  eleven  years,  so  that  in  the  past  ninety  years 
there  have  been  alternating  periods  of  financial  distress  and 
financial  prosperity,  each  period  averaging  about  five  and  a 
half  years.  But  in  addition  to  these  great  financial  crises 
there  have  been  many  panics  and  semi-panics,  most  of  them 
confined  to  Wall  Street,  but  felt  with  severity  there. 

Using  the  word  panic,  however,  in  its  common  meaning 
as  applying  to  both  kinds  of  monetary  convulsions,  the 
national  and  the  local,  the  commercial  and  the  speculative, 
it  may  be  instructive  to  enumerate  briefly  these  successive 
shocks  to  business. 


248  THE  WORK  OP  WALL  STREET 

Wall  Street's  first  panic,  if  it  may  be  dignified  by  that 
term,  was  in  1791-'92.  The  close  of  the  Revolutionary  War 
had  been  followed  by  a  boom  in  business,  both  in  England 
and  the  new  American  nation.  This  boom  led  to  over- 
speculation,  which  in  this  country  was  in  the  new  securities 
of  the  Government  and  in  the  stocks  of  the  recently  or- 
ganized banks.  "  The  period  immediately  succeeding  the 
Revolutionary  War,"  wrote  William  M.  Gouge  in  1833,  "  was 
in  a  peculiar  sense  an  age  of  speculation."  Distress  and 
embarrassment  followed,  and  to  relieve  the  stringency  in 
money,  Secretary  Hamilton  bought  United  States  bonds  in 
the  open  market,  thus  releasing  a  stream  of  Treasury  money. 
But  the  little  panic  did  not  last  long,  and  for  twenty  years 
the  United  States  enjoyed  a  period  of  marvelous  growth. 

The  second  war  with  England,  in  1812— '14,  precipitated 
the  first  great  commercial  crisis  of  the  new  country.  The 
closing  of  the  ports,  the  strain  and  expense  of  war,  and 
abuses  in  banking  were  the  causes  of  this  crisis.  Peace 
introduced  another  time  of  prosperity,  which  was  inter- 
rupted by  the  short  but  severe  panic  of  1818,  due  largely 
to  overexpansion  of  credits  by  the  United  States  Bank  and 
other  banking  institutions.  Much  misery  ensued,  and  the 
debtors'  prisons  were  filled. 

It  was  eight  years  before  tbere  was  another  panic,  and 
in  the  meantime  the  nation,  with  all  the  vitality  of  youth, 
recovered  from  its  financial  illness  and  enjoyed  wonderful 
growth  and  strength. 

There  was  a  panic  in  England  in  1825,  caused  by  two 
poor  harvests  and  overspeculation  in  South  American 
enterprises,  and  the  following  year  the  tide  of  disaster 
reached  the  United  States.  The  Franklin  Bank,  the  Mar- 
ble Manufacturing  Company,  and  other  firms  failed,  and 
Jacob  Barker  suspended.  This  disturbance  over,  the  country 
enjoyed  many  years  of  prosperity,  broken,  however,  by 
temporary  monetary  upheavals  in  1829  and  1831. 

But  in  1887  one  of  the  greatest  panics  in  the  history  of 


PANICS  249 

the  country  occurred.  There  had  been  a  partial  recovery 
from  this,  when  another  panic  broke  out  in  1839,  and  there 
was  another  upheaval  in  1841,  due  to  the  final  failure  of 
the  United  States  Bank.  The  next  panic  was  in  1848,  but 
was  not  so  disastrous.  It  was  produced  by  the  more  severe 
crisis  in  England  the  preceding  year. 

Eight  years  of  financial  calm  and  commercial  pros- 
perity followed,  with  immense  expansion,  due  chiefly  to 
the  discovery  of  gold  in  California,  but  in  1857  panic, 
like  that  in  1837,  burst  upon  the  country  almost  without 
warning. 

The  period  of  the  civil  war  presented  the  characteristics 
of  both  panic  and  boom.  Specie  payments  were  suspended 
and  the  banks  were  obliged  to  issue  loan  certificates,  but  the 
enormous  output  of  paper  money  produced  all  the  effects 
of  inflation.  There  was  wild  speculation  and  high  prices, 
but  the  fearful  strain  of  four  years  of  battles  severely  taxed 
the  resources  of  business.  Eighteen  hundred  and  sixty-four 
is  called  the  year  of  the  war  panic. 

The  failure  of  Overend,  Guerney  &  Company  in  England 
in  1866  produced  a  disturbance  in  Wall  Street,  but  nothing 
like  that  experienced  in  London.  Black  Friday  in  1869 
was  a  AVall  Street  panic.  The  Chicago  fire  of  1871,  involv- 
ing a  loss  of  $196,000,000,  and  the  Boston  fire  of  1872,  in- 
volving a  loss  of  $80,000,000,  also  caused  panics  in  the 
Street  and  much  distress  in  different  parts  of  the  country. 
They  were  among  the  many  things  that  brought  about  the 
great  commercial  crisis  of  1873,  from  which  both  Street  and 
nation  suffered  immense  losses. 

The  resumption  of  specie  payments  in  1879  ushered  in 
a  memorable  boom,  but  from  the  shooting  of  Garfield,  in 
1881,  there  started  a  gradual  downward  movement  that  cul- 
minated in  the  panic  of  188-4,  which,  in  its  worst  effects, 
was  confined  to  Wall  Street,  but  which  was  felt  to  some 
extent  all  over  the  country. 

The  next  panic  was  in  1890,  as  a  result  of  the  suspen- 


250  THE   WORK  OP  WALL  STREET 

sion  of  the  Barings,  of  London.  This  was  stopped  from 
becoming  a  world-wide  calamity  only  by  the  action  of  the 
Bank  of  England,  which  used  its  own  resources  and  those 
of  other  institutions  uniting  with  it  to  save  the  firm  from 
utter  failure.  The  New  York  Bank  Clearing-Ilouse  came 
to  the  relief  of  this  country  by  a  liberal  issue  of  loan  cer- 
tificates. Wall  Street  was  convulsed  by  the  blow  to  credit 
inflicted  by  this  event. 

In  this  same  year  the  Sherman  silver-purchase  bill  was 
passed  by  Congress.  While  it  was  still  under  discussion  in 
the  national  Legislature,  A.  J.  Drexel,  the  famous  Phila- 
delphia banker,  said  to  the  writer  that  it  would  cause  the 
worst  panic  from  which  this  country  had  ever  suffered,  a 
prediction  fulfilled  three  years  later.  The  panic  of  1893 
was  caused  by  the  fear  that  the  United  States  would  go  on 
a  silver  basis,  and  it  did  not  end  until  the  election  of  Mc- 
Ivinley  on  a  gold-standard  platform. 

The  great  convulsions  of  1837,  185T,  1873,  and  1893 
were  commercial  panics  of  national  scope.  As  a  matter  of 
fact,  the  effects  of  such  crises  are  world -wide.  All  true 
panics  are  international.  The  American  panics  of  1814, 
1818,  182fi,  1831,  1837,  1848,  1857, 1806,  1873,  1884, 1890, 
and  1893  were  closely  preceded,  accompanied,  or  followed 
by  similar  crises  in  Europe. 

Since  1897  Wall  Street  has  had  several  flurries  or  semi- 
panics,  such  as  those  caused  by  the  death  of  former  Gov- 
ernor Flower  and  the  early  British  defeats  in  the  Boer 
War,  but  only  one  real  panic — that  of  May  9,  1901 — and 
this  was  confined  entirely  to  the  stock-market. 

There  seems  to  be  no  absolute  safeguard  against  the 
great  commercial  crises.  But  there  has  been  evolved  a 
mechanism  which  checks  their  progress  and  minimizes  their 
evil  effects.  This  mechanism  is  supplied  by  the  Bank 
Clearing-Ilouse.  This  is  the  country's  breakwater  against 
the  waves  of  panic.  By  the  issue  of  Clearing-House  loan 
certificates,  the  banks  are  able  without  fear  to  extend  credit 


PANICS  251 

to  their  solvent  customers,  and  thus  thousands  of  deserving 
firms  are  saved  from  failure. 

But  loan  certificates  do  not  prevent  panics  ;  they  only 
check  them.  The  very  issue  of  loan  certificates  is  proof 
that  panic  has  begun.  The  very  suggestion  that  certificates 
should  be  issued  might  of  itself  be  sufficient  to  cause  a 
panic.  They  are  therefore  an  alleviation,  not  a  prevent- 
ive. They  represent  a  measure  adopted  as  a  last  resort. 
In  five  great  monetary  convulsions  they  have  performed  an 
immense  service  to  the  country,  but  something  better  and 
more  instantaneous  is  required. 

]STo  epidemic  travels  faster  than  fear,  and  most  Wall 
Street  panics  are  the  result  of  fear.  Generally  the  most 
that  can  be  done  is  to  establish  a  quarantine.  If  a  panic 
can  only  be  foreseen  it  may  be  stopped,  unless  indeed  the 
trouble  is  too  deep-seated.  But  the  unexpected  is  always 
happening  in  Wall  Street,  and  there  may  not  be  time  to 
raise  safeguards. 

Still  it  does  not  take  long  to  pull  the  lever  of  safety. 
Let  us  take  a  recent  and  typical  case.  Nothing  could  have 
been  more  unexpected  and  terrifying  than  the  shooting  of 
McKinley.  This  took  place,  fortunately,  after  the  close  of 
the  stock-market.  One  member  of  the  Clearing-IIouse 
Committee,  J.  Edward  Simmons,  was  in  the  city.  lie  took 
immediate  steps  to  prevent  the  threatened  panic.  The  next 
morning,  before  the  stock-market  opened,  a  meeting  was 
held  in  the  Clearing-IIouse,  attended  by  the  leading  bank- 
ers, at  which  a  pool  of  $30,000,000  was  formed,  and  the 
announcement  made  that  this  sum  would  be  loaned  in  the 
Exchange  at  market  rates.  Not  a  dollar  of  the  money  was 
used.  The  §30,000,000  were  not  needed.  The  very  assur- 
ance that  the  banks  were  ready  and  able  to  protect  the 
market  was  sufficient  to  prevent  any  panic. 

In  times  of  monetary  distress  there  is  also  another 
source  of  relief— the  Treasury.  This  has  been  explained 
in  another  chapter.  Better,  however,  than  any  Treasury 


252  THE  WORK  OF  WALL  STREET 

disbursement  by  redemptions  of  bonds  would  be  a  new  bank- 
ing system  providing  for  a  more  elastic  currency.  Such  a 
system  would  be  an  added  safeguard  against  the  ravages  of 
panic.  The  need  of  currency  reform  has  long  been  felt, 
and  at  last  the  country  seems  to  be  preparing  for  it,  al- 
though it  may  take  another  presidential  election  to  bring  it 
about. 

The  present  system  of  a  bank-note  circulation  based  on 
Government  bonds,  and  of  Government  deposits  in  the 
banks  also  secured  by  bonds,  is  absolutely  inadequate  to  the 
needs  of  the  country.  It  is  antiquated  and  inelastic.  In 
times  of  financial  distress  it  fails  to  furnish  the  needed  re- 
lief. Speaking  of  the  panic  of  1893,  former  Comptroller 
of  the  Currency  Hepburn  in  a  recent  address  said : 

"  The  Government  was  powerless  to  afford  relief.  Our 
currency  was  as  unresponsive  to  the  wants  of  trade  as  the 
pyramid  of  Cheops.  Some  banks  borrowed  United  States 
bonds  from  savings-banks  and  other  institutions  and  took 
out  circulation,  but  no  bank  could  buy  bonds  and  take  out 
circulation  without  aggravating  instead  of  relieving  the 
money  stringency.  AVhat  we  need  is  legislation  (or  relief 
from  legislation)  that  will  permit  banks  to  do  within  the 
law  and  under  wholesome  regulations  precisely  what  the 
banks  under  stress  of  necessity  did  in  1893  in  contravention 
of  law." 

Mr.  Hepburn  argues  that  the  time  has  gone  by  when 
the  Clearing-IIouse  loan  certificates  may  be  safely  availed 
of  in  the  city  of  Xew  York.  They  would,  he  says,  mate- 
rially impair  our  national  prestige  as  a  money  power  in  the 
world  of  finance  and  depreciate  our  securities  as  a  nation. 
They  would  materially  injure  the  banking  and  commercial 
interests  of  the  city. 

If  it  is  true  that  "Wall  Street  has  outgrown  the  mechan- 
ism of  Clearing-IIouse  loan  certificates,  there  is  indeed 
pressing  need  of  a  new  and  better  safeguard  against  panics. 
But  the  financial  doctors,  while  agreed  in  their  diagnosis  of 


PANICS  253 

the  disease,  disagree  as  to  the  treatment.  Many  of  them 
propose  an  asset  currency — that  is  to  say,  the  issue  of  bank- 
notes not  secured  .by  bonds,  but  based  on  the  assets  of  the 
issuing  banks.  This  is  the  reform  recommended  by  the 
House  of  Representatives  Committee  on  Currency  and 
Banking.  The  Fowler  bill  if  passed  would  permit  the 
national  banks  to  issue,  under  certain  restrictions,  asset 
currency  proportionate  to  their  capital.  The  bill  also  pro- 
vides for  branch  banks. 

But  other  experts  allege  that  an  asset  currency  would 
be  dangerous,  and  that  branch  banks  would  create  a  greater 
concentration  of  capital  in  the  leading  money  centers  than 
is  even  now  taking  place,  the  rest  of  the  country  being 
"  milked,"  as  it  were,  for  the  benefit  of  these  centers.  In 
reply,  proof  is  submitted  to  show  that  asset  currency  would 
be  both  safe  and  adequate,  and  that  this  is  the  only  great 
country  in  which  branch  banking  is  not  allowed. 

An  emergency  circulation  is  the  remedy  proposed  by 
those  who  are  equally  antagonistic  to  the  present  system 
and  to  asset  currency.  An  emergency  circulation,  to  be 
issued  and  retired  by  the  Clearing-IIouses,  would,  indeed,  be 
based  upon  assets,  but  would  be  so  heavily  taxed  that  it 
would  be  created  only  in  times  of  severe  stringency,  and 
would  be  quickly  retired  as  soon  as  the  period  of  need  and 
distress  passed.  "  We  do  not  want,"  argues  former  Comp- 
troller of  the  Currency  Da\ves,  "  an  asset  currency  that  will 
help  us  into  a  panic  when  we  are  out  of  one,  but  an  emer- 
gency circulation  which  will  help  us  out  of  a  panic  wrhen 
M~e  are  in  one." 

To  recapitulate : 

There  are  two  main  classes  of  panics.  1.  The  commer- 
cial crisis,  spreading  over  the  entire  country  and  involving 
every  department  of  business.  For  this  kind  of  panic  there 
is  now  one  principal  mechanism  of  relief,  namely,  the  Clear- 
ing-ITouse  loan  certificates,  which,  as  has  been  seen,  are  only 
an  inadequate  measure  of  the  last  resort.  2.  The  Wall  Street 


254  THE   WORK  OP   WALL   STREET 

panic,  confined  chiefly  to  the  stock-market  and  playing 
havoc  with  prices  of  securities,  but  not,  at  least  immedi- 
ately, harmful  to  outside  business.  It  is  sometimes  possi- 
ble by  a  prompt  application  of  the  power  of  the  money 
market  to  check  the  progress  of  this  kind  of  convulsion. 

But  it  is  urged  by  the  financial  experts  that  a  new 
mechanism  is  imperatively  demanded  by  the  conditions  of 
the  country,  a  mechanism  that  will  supply  additional  and 
safe  currency  when  it  is  most  needed,  and  that  will  be  re- 
tired when  there  is  no  further  use  for  it.  Two  main  prop- 
ositions are  made :  1.  A  continuous  note  circulation  based 
on  the  assets  of  the  banks.  2.  An  emergency  note  circula- 
tion based  on  assets,  but  available  only  in  time  of  panic. 

There  should  be  wise  action  before  the  next  commercial 
crisis  sets  in. 


CHAPTER  XXI 

MANIPULATION   AND    COENEKS 

MANIPULATION  is  of  two  kinds,  these  being  well  indi- 
cated by  the  Standard  Dictionary  definitions  of  the  word : 
1,  adroit  or  skilful  management;  2,  fraudulent  or  decep- 
tive management. 

The  latter  is  dishonest  without  qualification,  and  much 
of  the  odium  which  attaches  to  Wall  Street  is  the  result  of 
this  kind  of  stock  manipulation.  It  consists  mainly  in  the 
influencing  of  the  course  of  prices  by  false  reports.  This 
is  the  only  kind  of  manipulation  that  can  be  played  by  a 
small  man.  Any  one  can  lie,  and  a  lie  has  a  wonderful 
power  of  communicating  itself  through  the  Street  by  a  sort 
of  wireless  telegraphy.  It  is  remarkable  how  many  things 
one  hears  in  the  stock-market  that  "  aren't  so."  These  false 
reports  generally  have  a  temporary  effect  on  prices.  But  a 
lie  persisted  in  is  almost  as  good  as  the  truth.  A  false 
report,  therefore,  may  be  so  often  repeated  that  in  spite  of 
official  denials  many  will  continue  to  believe  in  it,  on  the 
principle  that  where  there  is  so  much  smoke  there  must  be 
some  fire.  In  such  a  case  the  effect  on  prices  may  be  pro- 
longed. The  laws  of  the  State  make  it  a  penal  offense  to 
originate  or  maliciously  repeat  falsehoods  for  the  purpose  of 
injuring  the  value  of  another's  property,  but  it  is  difficult 
to  track  a  lie  to  its  lair. 

In  a  suit  recently  brought  against  members  of  a  syndi- 
cate charged  with  fraudulent  manipulation,  the  complaint 
thus  described  its  operations  : 

18  355 


256  THE   WOHK  OF  WALL  STREET 

"Selling  stocks  to  the  public  by  improperly  spread 
'  tips  '  and  alleged  information. 

"  Procuring  loans  from  banking  institutions  throughout 
the  country  on  stocks  having  fictitious  values. 

"  Procuring  the  purchase  of  stocks  by  means  of  alleged 
customers  furnished  to  various  stock- brokerage  houses 
throughout  the  country.  The  said  customers  would  de- 
posit on  margin  with  the  brokers  a  small  proportion  of  the 
purchase  price  of  the  stocks,  and  these  brokers  would 
immediately  buy  for  their  supposed  customers'  account  the 
stocks  required,  paying  the  syndicate's  agents  the  full  price 
thereof,  these  brokers  advancing  the  difference  from  their 
own  funds  between  such  purchase  price  and  the  amount 
of  margin  deposited  with  them  by  their  supposed  cus- 
tomers." 

In  other  words,  by  false  tips  and  matched  orders  or 
wash  sales  the  manipulators  endeavored  to  establish  ficti- 
tious quotations  for  their  stocks.  If,  for  instance,  the 
security  was  actually  worth  only  $50  a  share,  and  by  this 
means  its  market  price  was  established  at  $120,  the  manipu- 
lators might  be  able  either  to  sell  to  innocent  investors  at 
nearly  150  per  cent  profit,  or  to  obtain  loans  from  country 
banks  for  amounts  largely  in  excess  of  true  value.  Bishop 
Potter,  in  a  recent  address  at  Yale,  said  truly  :  "  The  capi- 
talist whom  no  honest  man  can  hold  converse  with  is  he 
who  artificially  depresses  values  to  the  injury  or  loss  of  his 
fellow  directors,  or  who  withholds  information  regarding 
the  conditions  of  his  company  for  his  own  personal  advan- 
tage, or  who  by  obscure  bookkeeping  deceives  those  whose 
money  he  holds  in  trust."  He  might  also  have  added,  "  or 
who  artificially  advances  prices  to  the  injury,"  etc. 

But  there  is  a  higher  type  of  manipulation  than  this. 
It  may  be  described  as  the  fine  art  of  buying  and  selling 
stocks  to  the  best  advantage.  The  high  manipulator  is  the 
diplomatist  of  the  Street.  The  diplomatist  never  lies,  but 
he  sometimes  makes  the  worst  appear  the  better  reason. 


MANIPULATION  AND   CORNERS  257 

He  does  not  lie,  but  he  conceals  his  purposes  so  as  not  to 
disclose  his  operations. 

Secrecy  is,  in  fact,  the  first  object  of  stock  manipula- 
tion. It  is  quite  impossible  to  tell  in  a  few  words  how  this 
is  done.  But  it  may  be  said  briefly  that  the  manipulator 
operates  through  several  brokers  at  the  same  time.  He 
may  buy  through  some,  and  sell  through  others,  so  that  no 
one,  not  even  the  brokers  themselves,  can  be  certain  what 
his  true  position  in  the  market  is.  Let  us  suppose  that  the 
manipulator  represents  a  pool  which  has  a  large  amount  of 
stock  to  sell.  It  would  not  do  to  throw  it  upon  the  market 
at  once,  nor  is  it  advisable  that  the  Street  should  know  that 
the  pool  is  selling.  So  it  may  be  buying  with  one  hand 
and  selling  with  the  other,  being  careful,  however,  to  sell 
more  than  it  buys,  and  thus  in  the  course  of  time  the  whole 
amount  may  be  disposed  of.  There  may  have  been  a  loss 
on,  say,  100,000  shares  bought,  but  the  profit  on  150,000 
shares  sold  may  be  so  large  as  to  make  the  entire  operation 
very  satisfactory  to  the  members  of  the  pool.  In  order  to 
maintain  the  price  of  the  stock  it  is  trying  to  sell,  the  pool 
may  find  it  necessary  to  buy  other  stocks,  in  order  to  give 
the  general  market  the  appearance  of  strength.  Capitalists 
controlling  a  railroad  system  generally  consider  it  essential 
to  "  support "  the  stocks  of  the  system,  as  the  credit  of  the 
railroad,  its  ability  to  borrow  money,  and  the  ability  of  its 
individual  directors  to  obtain  the  means  for  large  opera- 
tions depend,  in  no  small  measure,  on  the  market  value  of 
its  securities.  Likewise  an  underwriting  syndicate  which 
has  undertaken  to  float  a  large  issue  of  new  securities  is 
sometimes  compelled  to  prepare  the  market  to  absorb  them. 
This  preparation  may  consist  of  an  elaborate  manipulation 
of  both  money  and  stock  markets,  so  as  to  make  rates  for 
loans  easy  and  prices  of  stocks  attractive  to  investors  and 
speculators.  As  a  preliminary  to  a  bull  market,  it  is  often 
necessary  first  to  clean  out  the  weak  holders  of  stocks  and 
depress  prices  to  a  point  where  they  look  like  bargains. 


258  THE  WORK  OF   WALL  STREET 

The  first  act  of  a  bull  pool,  therefore,  may  actually  be  to 
bear  prices.  If  the  manipulator  seeks  to  accumulate  stocks, 
he  will  of  course  try  to  break  prices  by  a  raid  or  attack  on 
the  market,  which  is  accomplished  by  furiously  selling  short. 
Suppose  the  manipulator  discovers  that  long  stock  is  held  in 
weak  hands,  and  that  there  are  many  stop  orders  in  the 
market.  He  may  institute  a  bear  attack  in  order  to  force 
liquidation,  and  uncover  the  stop  orders,  which,  as  has 
already  been  explained,  are  orders  to  sell  when  prices  reach 
certain  figures,  generally  marking  the  limits  of  the  cus- 
tomers' margins.  The  manipulator  may,  and  often  does, 
strive  to  influence  prices  in  New  York  by  having  orders 
cabled  from  London,  so  as  to  convey  the  impression  that 
English  investors  are  in  the  market.  This  often  has  the 
desired  effect  on  prices. 

Manipulation  of  the  highest  kind  is  a  millionaire's  game. 
It  can  not  be  played  by  the  man  of  limited  means.  It 
requires  command  of  immense  resources,  such,  for  instance, 
as  James  R.  Keene  possesses  as  a  man  of  wealth  himself 
and  as  the  agent  of  capitalists  and  syndicates  of  enormous 
power.  The  manipulator  in  stocks  is  like  the  manipulator 
in  politics,  who  pulls  the  wires,  which  are  generally  under- 
ground, in  order  to  control  conventions  and  make  nomina- 
tions. But  the  politician,  while  thus  engaged,  can  not 
entirely  ignore  the  potency  of  public  policies,  and  can  not 
defy  too  long  the  will  of  the  people,  or  he  may  be  over- 
whelmed. So  the  manipulator  in  stocks,  by  pulling  con- 
cealed wires  and  by  a  scientific  arrangement  of  his  forces 
as  intricate  and  fascinating  as  a  game  of  chess,  is  able  to 
make  prices.  But  he  must  nevertheless  not  go  too  far 
from  the  true  basis  of  value,  or  even  he  may  be  over- 
whelmed in  the  market. 

Manipulation  plays  an  important  part  in  stock  specula- 
tion. Fur  days  and  even  weeks  together  the  market  may 
be  in  the  hands  of  the  manipulators.  Difficult  as  it  is  to 
estimate  values,  it  is  still  more  difficult  to  fathom  the 


MANIPULATION  AND  CORNERS  259 

intrigues  of  the  manipulators.  It  is,  however,  generally 
possible  to  ascertain  whether  the  market  as  a  whole  is  sub- 
ject more  to  professional  than  public  control. 

A  corner  is  that  condition  of  a  stock  in  which  the  sup- 
ply is  held  by  one  operator  or  by  a  clique  of  operators, 
and  in  which  many  have  contracted  to  deliver  to  the 
operator  or  clique  what  they  can  obtain  only  from  the 
operator  or  clique.  This  is  a  condition  which  results  from 
the  operation  of  selling  short.  For  instance,  the  total  issue 
of  a  certain  stock  may  be  100,000  shares.  A  clique  of 
operators  have  quietly  acquired  all  the  available  supply,  as 
well  as  40,000  shares  more,  bought  from  speculators  who, 
believing  that  the  price  was  too  high,  have  sold  the  stock 
short.  It  is  obvious  that  when  these  shorts  are  called  upon 
to  deliver  the  stock  they  have  sold,  they  find  that  they  can 
buy  only  from  those  to  whom  they  have  sold,  and  are 
therefore  caught  in  a  vise.  The  only  way  of  escape  is  by 
settling  at  a  price  fixed  by  the  clique  or  by  a  repudiation 
of  contracts,  which  amounts  to  failure.  The  victims  of  a 
corner  are  not  generally  entitled  to  much  sympathy,  as 
they  have,  with  their  eyes  open  to  the  risks  involved,  sold 
something  they  did  not  own. 

Corners  may  be  divided  into  two  classes,  one  including 
those  which  are  deliberately  planned,  and  the  other  those 
which  create  themselves.  The  corner  of  1901  in  Northern 
Pacific,  which  advanced  the  price  to  1,000,  was  of  the  second 
class.  It  resulted  naturally  from  a  contest  for  the  control 
of  the  company  between  two  great  syndicates  which  bought 
the  entire  issue  of  stock.  Meanwhile,  other  individuals 
had  sold  short  what  they  did  not  own,  and  when  called 
upon  to  deliver  on  their  contracts,  found  that  the  market 
supply  was  exhausted,  and  that  the  two  syndicates,  having 
bought  for  actual  control,  wanted  the  stock  and  not  a  settle- 
ment of  differences.  The  result  was  a  convulsion  in  the 
market. 

Wall  Street  has  had   many  corners  in  the  past  seventy 


260  THE  WORK  OF  WALL  STREET 

years.  The  most  famous  of  all  was  Gould's  attempt  to  cor- 
ner gold,  which  ended  in  Black  Friday.  Another  celebrated 
corner  was  that  in  Hannibal  &  St.  Joseph  stock  in  1881. 
This  was  conducted  by  John  R.  Duff,  and  was  not  success- 
ful, owing  to  the  faithlessness  of  Duff's  broker,  who  was 
expelled  from  the  Exchange. 

Soon  after  this  deal  the  State  Legislature  appointed  a 
committee  to  investigate  corners,  and  its  report  covered 
several  hundred  pages,  but  resulted  in  no  important  legisla- 
tion. As  long  ago  as  1836  the  Stock  Exchange  itself 
appointed  a  committee  to  investigate  corners.  There  had 
been  the  year  before  two  big  corners.  A  clique  bought  up 
the  stock  of  the  Morris  Canal  Company  much  below  par 
and  compelled  many  shorts  to  settle  at  150.  There  was  a 
corner  in  Harlem  the  same  year.  There  were  only  7,000 
shares  then  issued,  and  yet  the  pool  was  able  to  buy  from 
shorts  over  60,000  shares  inside  of  two  months,  and  com- 
pelled them  to  settle  at  high  figures. 

In  1803  and  1861  Commodore  Yanderbilt's  two  cele- 
brated corners  in  Harlem  took  place.  In  one  lie  caught 
the  city  aldermen,  and  in  the  other  the  State  legislators, 
short,  and  compelled  them  to  submit  to  his  terms.  The 
corners  grew  out  of  a  franchise  to  lay  rails  on  Broadway, 
and  the  politicians  thought  that  they  held  the  key  to  the 
speculation,  but  they  were  beaten  by  one  of  the  ablest  men 
in  American  business.  The  Prairie  du  Cliien  corner  in 
1865  ;  the  corner  in  Michigan  Southern  in  1866  ;  the  many 
corners  in  Erie  conducted  by  Drew  and  Gould  ;  the  corner 
in  Northwest,  engineered  by  Gould  in  1872,  when  the 
shorts  had  to  settle  at  23<»,  and  when  an  attempt  was  made 
to  deliver  preferred  stock  on  common-stock  contracts;  and 
S.  Y.  White's  corner  in  Lackawanna  in  March,  188-1 — these 
are  among  the  notable  events  in  the  history  of  speculation. 

Corners  in  grain,  cotton,  and  coffee  have  generally  been 
failures.  Even  Keene  failed  utterly  in  an  effort  to  corner 
the  corn  market.  The  reason  is  that  the  products  are  too 


MANIPULATION  AND  CORNERS  261 

large,  and  there  are  too  many  sources  of  supply,  successfully 
to  establish  a  monopoly.  Still  there  have  been  a  few  suc- 
cessful corners  in  products,  and  it  is  related  that  one  hun- 
dred and  twelve  years  ago  Ouvrard,  a  noted  European 
speculator,  succeeded  in  cornering  first  the  paper  and  then 
the  coffee  market. 

While  manipulation  and  corners  have  not  been  and 
apparently  can  not  be  prevented,  many  of  the  grosser  evils 
that  formerly  attended  them  have  been  reformed.  The 
millennium  has  not  arrived  in  Wall  Street,  but  security  and 
good  faith  abound  there  to  a  larger  extent  than  they  did 
thirty  years  ago. 


CHAPTER  XXII 

THE     STATE    OF    TRADE 

WALL  STREET  by  manipulation  may  control  prices,  but 
the  country  makes  values.  The  connection  between  the 
stock-market  and  the  business  of  the  nation  is  necessarily 
very  intimate.  As  the  Street  serves  as  the  clearing-house 
of  commerce,  finances  the  railroads  and  great  industrial 
enterprises,  and  furnishes  the  facilities  for  moving  the 
crops  to  market,  an  upheaval  in  the  Stock  Exchange,  if  of 
sufficient  magnitude,  may  be  felt  in  every  shop  and  mill 
and  farm  from  the  Atlantic  to  the  Pacific.  On  the  other 
hand,  depression  in  trade  produces  stagnation  in  specula- 
tion. 

The  three  main  sources  of  a  nation's  wealth  are  its 
mines,  its  agriculture,  and  its  manufactures.  The  securities 
dealt  in  on  the  Exchange  represent  the  mines,  the  crops, 
and  the  products  of  the  factories.  If  the  mines  are  prolific, 
the  crops  bountiful,  and  the  forges  ablaze  by  night  and  by 
day,  the  fact  is  reflected  in  the  Stock  Exchange  transactions. 
Prices  advance,  sales  increase,  speculation  is  active.  Wall 
Street  therefore  keeps  its  fingers  constantly  on  the  pulse 
of  trade. 

The  three  principal  products  of  the  mines  are  gold,  iron, 
and  coal.  An  enormous  output  of  gold  such  as  followed  its 
discovery  in  California,  and  more  recently  in  the  Klondyke 
and  the  Transvaal,  has  been  responsible  for  great  uplifts  in 
prices  and  activity  in  speculation.  Less  than  twenty  years 
ago  depression  in  the  coal  trade  caused  a  severe  shrinkage 
262 


THE  STATE  OP  TRADE  263 

in  the  prices  of  the  coal  stocks,  and- the  whole  stock-market 
suffered  thereby.  In  1902  the  market  suffered  from  a 
strike  in  the  anthracite  coal  region.  The  unequaled  activ- 
ity in  the  iron  and  steel  trade  for  the  past  five  years  was 
one  of  the  prime  factors  in  the  boom  in  stocks  and  in  busi- 
ness. The  three  principal  crops  are  cotton,  wheat,  and  corn. 
The  time  was  when  "  cotton  was  king,"  and  a  failure  in  the 
cotton-crop  spelled  national  disaster.  Even  now  a  short 
cotton-crop  would  be  not  only  a  severe  blow  to  the  South, 
but  also  inflict  a  loss  that  would  be  felt  more  or  less  all  over 
the  country.  A  failure  in  corn-  or  wheat-crop  has  more 
than  once  been  the  forerunner  of  a  commercial  crisis. 
Prosperous  as  the  country  now  is,  it  nevertheless  feels  the 
effect  of  the  short  corn-crop  of  1901.  But  the  time 
seems  to  be  past  when  disaster  to  one  crop  or  one  indus- 
try necessarily  means  a  general  business  convulsion.  It 
takes  a  combination  of  calamities  to  produce  wide-spread 
panic. 

There  are  two  excellent  barometers  of  trade :  1,  the 
exchanges  of  the  clearing-houses ;  2,  the  earnings  of  the 
railroads.  The  banks  supply  the  credit  necessary  to  carry 
on  the  operations  of  production  and  transportation,  and 
their  transactions  are  a  true  measure  of  business  activity. 
There  are  more  than  ninety  clearing-houses  in  the  United 
States,  and  the  aggregate  of  their  exchanges  of  checks  and 
drafts  affords  an  almost  unfailing  indication  of  the  volume 
of  business.  "While  the  Xew  York  Clearing-IIouse  is  the 
largest  and  most  important  of  all,  its  exchanges  are  not 
always  as  fair  a  guide  to  the  state  of  trade,  because  they  are 
swelled  by  the  large  volume  of  speculation  in  AVall  Street. 
For  instance,  a  statement  for  the  week  ending  March  0, 
1(,H>2,  showed  a  loss  in  bank  clearings  of  nearly  8  per  cent 
from  the  year  previous.  But  this  loss  was  almost  entirely 
in  Xew  York,  where  there  had  been  a  large  decrease  in 
stock  speculation.  Outside  of  Xew  York  there  was  a  gain 
of  9  per  cent.  From  this  it  would  be  fair  to  infer  that, 


264  THE   WORK  OF   WALL  STREET 

while  the  stock-market  was  dull,  general  trade  was  active, 
which  was  indeed  the  actual  fact.  The  two  leading  com- 
mercial agencies,  R.  G.  Dun  and  Company  and  Bradstreet's, 
make  a  practise  of  gathering  weekly  reports  from  all  the 
clearing-houses,  and  every  Friday  night  they  issue  reviews 
of  the  state  of  trade,  containing  summaries  not  only  of 
the  bank  clearings,  but  also  of  railroad  earnings,  crop  re- 
ports, trade  statistics,  etc.,  the  whole  presenting  generally 
excellent  pictures  of  the  business  situation. 

The  railroads  are  not  producers  of  wealth,  but  trans- 
porters. They  connect  the  farm  and  the  factory  with  the 
consumers.  They  carry  the  corn,  the  cotton,  the  iron,  and 
the  manufactured  products  to  the  markets.  So  statistics  of 
the  gross  earnings  of  the  railroads  afford  an  index  of  trade 
conditions.  When,  therefore,  one  sees  a  statement  like 
this,  k'  Railway  earnings  for  the  first  week  in  May  increased 
6.02  per  cent  over  those  of  the  corresponding  week  of  last 
year,  and  19.9  per  cent  over  1900,"  it  is  fair  to  assume  that 
trade  is  maintaining  a  rapid  pace. 

As  most  of  Wall  Street  speculation  is  in  railroad  stocks, 
and  as  one-fifth  of  the  nation's  wealth  is  invested  in  rail- 
roads, it  is  needless  to  say  how  important  from  every  point 
of  view  becomes  the  condition  of  these  properties.  Rail- 
road reports  are  therefore  the  chief  literature  of  Wall 
Street.  They  are  studied  by  its  experts  with  analytical 
skill.  The  weekly  statements  of  gross  earnings  collectively 
show  whether  business  has  gained  or  lost.  The  monthly 
statements  show  something  of  the  management  of  the  rail- 
roads, as  these  give  not  only  the  gross  receipts,  but  also  the 
operating  expenses  and  the  net  earnings.  It  may  happen 
that  while  a  railroad  is  earning  more,  it  is  also  costing  still 
more  to  operate  it ;  in  which  case,  while  the  gross  earnings 
show  an  increase,  the  net  earnings  reveal  a  decrease,  and  it 
is  from  the  net  earnings  that  interest  and  dividends  are 
paid. 

The  annual  report  is,  or  ought  to  be,  a  complete  state- 


THE  STATE  OF  TRADE  265 

merit  of  the  entire  business  of  the  railroad,  containing  a 
financial  balance-sheet,  a  description  of  its  physical  condi- 
tion and  equipment,  arid  detailed  reports  of  operations  in 
every  department,  showing  the  different  sources  of  revenue, 
the  amount  and  kind  of  freight  carried,  the  number  of  pas- 
sengers transported,  the  various  objects  of  expenditure,  the 
cost  of  improvements  and  operation,  etc.,  the  whole  usually 
accompanied  by  some  general  account  of  policy  by  the 
president. 

The  St.  Paul  reports  are  regarded  by  many  experts  as 
being  on  the  whole  the  fullest  in  details  of  any  issued. 
One  must  know  how  to  analyze  a  railroad  report  in  order 
to  be  able  to  use  it  to  the  best  advantage.  It  must  be 
studied  by  comparison  with  preceding  reports  of  the  same 
company,  and  with  reports  of  other  lines  in  the  same  sec- 
tion of  the  country.  The  object  of  analysis  is  to  ascertain 
the  true  value  of  the  securities  of  the  company.  Take,  for 
instance,  any  given  railroad.  We  ascertain,  first,  its  mile- 
age. In  order  to  obtain  the  value  of  a  piece  of  real  estate 
as  compared  with  another  property  in  the  same  street,  it  is 
necessary  to  reduce  both  to  the  number  of  feet  fronting  on 
the  street.  In  like  manner,  to  compare  the  operations  of 
one  road  with  those  of  another  of  different  length,  it  is 
necessary  to  reduce  every  item  of  income  and  expense  to  per 
miles.  Thus  we  find  how  much  the  capital  stock  is  per 
mile,  how  much  the  gross  earnings  are  per  mile,  what  are 
the  operating  expenses  per  mile,  what  the  fixed  charges 
are  per  mile,  what  the  net  income  or  surplus  is  per  mile, 
and  how  much  this  surplus  amounts  to  on  the  stock.  We 
then  compare  this  exhibit  with  that  of  other  lines  in  the 
same  territory,  study  the  history  of  the  company,  and  learn 
all  we  can  of  the  character  of  its  management.  We  are 
now  prepared  to  form  a  judgment :  1.  Whether  the  com- 
pany's capital  is  or  is  not  above  the  average  issue  of  lines  in 
the  same  territory — in  other  words,  whether  it  is  or  is  not 
overcapitalized.  2.  Whether  the  gross  earnings  per  mile 


266  THE  WORK  OP  WALL  STREET 

compare  favorably,  or  otherwise,  with  those  of  the  other 
systems.     3.  Whether  the  percentage  of  operating  expenses 
indicates  economical  management  or  not.     4.  Whether  the 
fixed  charges  are  too  heavy  or  otherwise.     5.  Whether  the 
surplus  applicable  to  dividends  exceeds  the  dividends  actu- 
ally paid,  and  whether  or  not  it  is  likely  to  increase.     If 
the  price  of  the  stock  is  170  and  the  dividend  is  6  per  cent, 
it  yields  to  the  holder  3.52  per  cent ;  but  if  the  net  income 
applicable  to  dividends  amounts  to  9  per  cent,  that  means  a 
possible  yield  of  5.29  per  cent  on  the  stock  at  the  market 
price.     If  the  history  of  the  company  shows   consistent, 
conservative,  and  honest  management,  we  are,  with  all  these 
facts  in  our  possession,  prepared  to  determine  whether  the 
market  price  is  too  low  or  too  high.     To  Albert  Fink,  long 
Pool  Commissioner,  is  due  the  credit  of  having  given  a  sci- 
entific form  to  railroad  reports,  and  the  leading  companies 
now  conform  mere  or  less  to  his  ideas.     Those  who  wish  to 
get  a  close  and  critical  view  of  this  scientific  form  should 
consult    Thomas    F.  WToodlock's  Anatomy  of   a  Railroad 
Report. 

Crop  reports  are  issued  regularly  by  the  Government 
Department  of  Agriculture,  and  these  give  official  infor- 
mation regarding  the  acreage  and  condition  of  the  growing 
crops.  For  instance,  in  April  an  estimate  is  given  of  the 
average  condition  of  winter  wheat ;  in  June  estimates  are 
given  of  spring  and  winter  wheat;  in  July  the  acreage 
and  condition  of  corn  is  disclosed  ;  and  so  on  through  the 
year,  each  month's  report  giving  a  showing  of  all  the  prin- 
cipal crops  of  the  country.  Wall  Street  is  not  content  to 
rely  entirely  on  these  official  reports.  Many  unofficial  re- 
ports are  issued,  some  of  them  elaborate  and  reliable,  being 
summaries  of  statements  sent  in  from  hundreds  of  corre- 
spondents in  all  sections  of  the  crop  area.  The  Government 
also  issues  monthly  reports  of  commerce  showing  the  value 
of  imports  and  exports. 

From  these  various  sources  of  information  Wall  Street 


THE  STATE  OF  TRADE  267 

contrives  to  keep  fairly  well  posted  as  to  the  state  of  the 
country,  and  if  its  stock-market  goes  astray  from  the  line 
of  true  value,  it  is  because  it  fails  to  comprehend  the  facts 
as  they  are  presented,  or  because  of  manipulation  or  of  some 
derangement  of  the  street's  machinery,  such  as  a  stringent 
money  market. 


CHAPTER  XXIII 

PE8T8     OF     WALL     STREET 

THE  Wall  Street  district  is  filled  with  bucket-shops  in 
various  forms,  bogus  brokers,  tipsters,  blind -pool  sharps, 
and  men  who  offer  to  sell  you  an  infallible  system  for  beat- 
ing the  stock-market.  It  was  estimated  last  year  that  there 
were  more  than  two  hundred  bucket-shops  in  and  around 
Wall  Street,  and  upward  of  eight  hundred  in  the  United 
States.  Some  of  these  concerns  go  by  the  name  of  "  Ex- 
changes" and  "Syndicates."  Others  advertise  largely  as 
"  bankers,"  and  maintain  expensively  furnished  suites  of 
offices. 

The  Street  has  suffered  severely  in  money  and  reputa- 
tion from  these  pests  of  speculation.  They  certainly  do 
a  heavy  business,  a  part  of  which  would  otherwise  flow 
through  the  regular  channels  of  speculation.  The  outsider 
naturally  identifies  them  with  the  legitimate  operations  of 
the  Street.  He  supposes  that  they  are  a  part  of  the  system. 
But  they  are  foul  excrescences  on  the  stock-market.  They 
are  practically  of  the  same  character  as  pool-rooms  and 
policy-shops.  They  are  gambling  places,  with  this  differ- 
ence in  favor  of  the  gambling-house :  there,  one  can  at 
least  see  the  dealer ;  but  in  these  outside  Wall  Street  con- 
cerns one  enters  a  blind  pool,  and  he  may  or  may  not  meet 
with  fair  treatment. 

In  the  bucket-shop  there  is  no  actual  transfer  of  stock 
or  "  intent  to  deliver."  All  that  takes  place  practically  is 
the  registering  of  a  bet  on  prices.  This  affords  facilities  for 
368 


PESTS  OP  WALL  STREET  269 

cheap  speculation,  and  the  bucket-shops  are  filled  with 
clerks  and  other  persons,  women  as  well  as  men,  of  small 
salaries  or  incomes,  all  eager  to  double  their  money  in  the 
Street,  and  all  inflamed  by  the  stories  told  of  the  immense 
fortunes  that  have  been  made  there.  These  are  the  very 
people  who  should  keep  out  of  the  stock-market.  They 
have  not  the  means  and  the  knowledge  for  successful  oper- 
ations there.  Most  people  who  enter  Wall  Street  are  bulls, 
and  the  customers  of  the  bucket-shops  bet  that  prices  will 
advance,  so  that  the  proprietors  reap  a  golden  harvest  in  a 
bear  market.  In  a  continuous  bull  market  the  bucket-shops 
generally  shut  up.  They  can  make  no  money  when  their 
customers  are  winning.  That  is  the  difference  between 
them  and  the  Stock-Exchange  broker.  The  latter  is  most 
successful  when  his  customers  are  making  money.  Every 
now  and  then  the  papers  record  the  failure  of  one  of  these 
bucket-shop  firms.  The  real  proprietors  decamp,  and  all 
that  remain  are  a  few  clerks,  a  set  of  oifice  furniture,  and 
a  crowd  of  clamorous  and  angry  customers.  Most  of 
the  concerns  have  high-sounding  names,  sometimes  imi- 
tating as  much  as  possible  the  names  of  famous  houses. 
Usually  the  men  actually  in  control  keep  in  the  back- 
ground. 

Writing  of  bogus  brokers,  Francis  L.  Eames  says,  in 
his  book  on  "  The  Stock  Exchange  " :  "  These  people  estab- 
lish themselves  in  the  neighborhood  of  "Wall  Street  in  large, 
imposing  offices,  with  numerous  clerks.  By  extensive 
advertising  in  the  newspapers  and  by  sending  out  vast 
quantities  of  circulars  through  the  mails,  large  sums  of 
money  are  drawn  from  the  public  theoretically  for  specula- 
tion in  stocks.  The  bogus  broker  is  not  connected  with 
the  Exchange,  and  no  stocks  are  really  bought  or  sold, 
though  notices  of  purchase  and  sale  are  given  to  custom- 
ers, usually  without  the  names  of  the  parties  with  whom 
the  contracts  are  supposed  to  have  been  made.  A  favor- 
ite method  is  to  induce  people  to  enter  into  alleged 


270  THE  WORK   OF   WALL  STREET 

syndicate  operations  or  pools,  and  customers  are  told  of 
the  large  sums  that  have  been  made  in  previous  opera- 
tions." 

The  Stock  Exchange  wages  relentless  war  on  the  bucket- 
shops  and  bogus  brokers,  and  has  tried  in  every  way  to 
deprive  them  of  its  quotations,  but  they  thrive  in  spite  of 
all.  A  new  crop  of  victims  is  harvested  every  year.  The 
sublime  credulity  of  some  people  when  it  comes  to  invest- 
ing their  money  was  signally  illustrated  in  the  case  of 
Miller,  the  5 20 -per-cent- Franklin -Syndicate  man,  who  even 
after  he  was  sent  to  prison  for  his  swindle  continued  to 
receive  money  from  persons  in  different  parts  of  the  coun- 
try, asking  him  to  invest  it  for  them. 

Senator  Spooner,  in  a  recent  speech  in  the  United  States 
Senate,  declared  "  that  dealings  in  the  bucket-shops  consti- 
tute an  insidious  and  destructive  form  of  gambling."  Yet 
Congress,  in  passing  the  \var-tax  repeal  bill,  would  not 
retain  the  tax  on  bucket-shops,  which  had  had  the  effect  at 
least  of  reducing  their  number. 

There  is  one  way  of  differentiating  between  Stock-Ex- 
change and  bogus  brokers.  The  former,  when  they  adver- 
tise, advertise  only  their  names,  their  business,  and  their 
Exchange  connection.  They  might  make  the  line  of  sepa- 
ration from  the  bogus  brokers  still  clearer  if  they  did  not 
advertise  at  all.  In  February,  1898,  the  Governing  Com- 
mittee of  the  Stock  Exchange  passed  the  following  resolu- 
tion : 

"  Resolved,  That,  in  future,  the  publication  of  an  adver- 
tisement of  other  than  a  strictly  legitimate  business  character 
by  a  member  of  the  Exchange  shall  be  deemed  an  act  detri- 
mental to  the  interest  and  welfare  of  the  Exchange." 

The  Exchange  might  well  have  gone  a  step  further,  and 
prohibited  the  members  from  advertising  at  all.  That  is 
the  rule  of  the  London  Stock  Exchange,  which  not  only 
prohibits  advertising  by  members,  but  itself  advertises  the 
fact  in  the  newspapers  as  follows  ; 


PESTS  OF  WALL  STREET  271 

THE   STOCK   EXCHANGE 

NOTICE 


No  Member  of  the  Stock  Exchange  is  allowed  to  advertise  for  busi- 
ness purposes,  or  to  issue  circulars  to  persons  other  than  his  own  prin- 
cipals. 

Persons  who  advertise  as  Brokers  or  Share  Dealers  are  not  Members 
of  the  Stock  Exchange,  or  under  the  control  of  the  Committee. 

A  list  of  Members  of  the  Stock  Exchange  who  are  Stock  and  Share 
Brokers  may  be  seen  at  the  Bartholomew-lane  entrance  of  the  Bank  of 
England,  or  obtained  on  application  to 

EDWARD  SATTEETHWAITE, 

Secretary  to  the  Committee  of  the  Stock  Exchange. 

COMMITTEE  ROOM,  THE  STOCK  EXCHANGE,  LONDON,  E.  C. 

This  has  the  effect  of  marking  a  line  of  separation 
between  legitimate  and  illegitimate  brokers  like  that  exist- 
ing between  reputable  doctors,  who  do  not  advertise,  and 
quacks,  who  do. 

The  bogus  broker  and  tipster  fill  the  advertising  col- 
umns with  their  flamboyant  appeals  to  would-be  specula- 
tors. Advertising  is  expensive,  but  it  must  pay  them. 
Some  of  the  advertisements  of  the  bogus  brokers  are 
indeed  masterpieces  of  the  art  of  ad.  writing. 

Wall  Street  is  too  often  judged  by  these  bucket-shops 
and  tipsters.  It  would  be  fairer  to  judge  it  by  such  men 
of  character  and  faithfulness  to  trusts  as  the  late  Frederick 
D.  Tappen,  of  whom  J.  Edward  Simmons,  in  a  recent 
eulogy,  said  : 

"K"ot  all  the  great  battles  of  the  world  are  won  by  the 
soldier.  There  are  generals  in  finance  as  in  war.  There 
are  heroes  in  the  counting-house  as  well  as  on  the  battle- 
field ;  men  who  for  honor  and  for  duty  stand  firm,  with 
undaunted  courage,  at  the  post  of  danger  in  the  day  of 
trial." 


19 


BIBLIOGKAPHY 

List  of  authorities  consulted  in  the  preparation  of  this 
work,  exclusive  of  official  documents : 

A  History  of  Banking  in  all  the  Leading  Nations;  edited  by  the 

Editor  of  the  Journal  of  Commerce  and  Commercial  Bulletin. 
ADAMS,   CHARLES  F.,  Jr.,  and  HENRY:  Chapters  of  Erie  and  other 

Essays,  1886. 

American  Almanac,  1834-1861. 
BAGEIIOT,  WALTER:   Lombard  Street;   A  Description  of  the  Money 

Market,  1873. 

Bank  of  America ;  anonymous,  1887. 
Bank  of  England ;  anonymous,  1865. 
Bankers'  Magazine,  1846-1901. 

BARRETT,  WALTER:  The  Old  Merchants  of  New  York,  1885. 
BENTON,   THOMAS  H. :    Thirty  Years  in  the  United  States  Senate, 

1820-1850. 

BRYCE,  JAMES  :  The  American  Commonwealth,  1891. 
CANNON,  JAMES  G. :  Clearing-Houses;   Their  History,  Methods,  and 

Administration,  1900. 

CLARE,  GEORGE:  The  A  B  C  of  the  Foreign  Exchanges,  1893. 
CLEWS,  HENRY:  Twenty-Eight  Years  in  Wall  Street,  1888.   The  Wall 

Street  Point  of  View,  1900. 

COFFIN,  GEORGE  M. :  The  A  B  C  of  Banks  and  Banking,  1900. 
CRUMP,  ARTHUR:  The  Theory  of  Stock  Speculation;  edited  by  S.  A. 

Nelson,  1901. 

DOMETT,  HENRY  W. :  A  History  of  the  Bank  of  New  York,  1884. 
Dos  PASSOS,  JOHN  R. :    Treatise  on  the  Law  of  Stock-Brokers  and 

Stock  Exchanges,  1882. 

DUGUID,  CHARLES:  The  Story  of  the  (London)  Stock  Exchange,  1901. 
EAMES,  FRANCIS  L. :  The  New  York  Stock  Exchange,  1894. 
GIBBONS,  T.  S. :  The  Banks  of  New  York,  1859. 
GOUGE,  WILLIAM  M. :  A  Short  History  of  Paper  Money  and  Banking 

in  the  United  States,  1833. 
GREENE,  THOMAS  L. :  Corporation  Finance,  1901. 

273 


274:  THE  WORK  OF  WALL  STREET 

GUIZOT  :  The  History  of  France ;  translated  by  Robert  Black,  1876. 

HONE,  PHILIP:  Diary  of  1828-1851. 

HUNT,  FREEMAN:  Merchants'  Magazine,  1839-1870. 

JEVONS,  W.  STANLEY:  Money  and  the  Mechanism  of  Exchange,  1876. 

JUGLAR,  CLEMENT  :  A  Brief  History  of  Panics ;  edited  by  De  Courcey 

W.  Thorn,  1897. 

LAMB,  Mrs.  MARTHA  J. :  History  of  the  City  of  New  York,  1877. 
Me  AD  AM,  GRAHAM:  An  Alphabet  in  Finance,  1876. 
MACAULAY,  THOMAS  B. :  The  History  of  England,  1861. 
MACLEOD,  HENRY  DUNNING:    The  History  of  Economics,  1896.     A 

History  of  Banking  in  Great  Britain,  1896. 
MEDBERY,  JAMES  K. :  Men  and  Mysteries  of  Wall  Street,  1870. 
MUHLEMAN,  MAURICE  L. :  Monetary  Systems  of  the  World. 
NELSON,  S.  A. :  The  A  B  C  of  Wall  Street,  1900. 
NORTON,  ELIOT  :  On  Right  to  pledge  Securities  carried  on  a  Margin. 

On  buying  and  selling  Securities  through  a  Member  of  the  Stock 

Exchange,  1896. 

PINTO,  ERASMUS:  Ye  Outside  Fools,  1877. 
RICHARDSON,  THOMAS  D. :  Wall  Street  by  the  Back  Door,  1901. 
SEYD,  ERNEST:  Bullion  and  Foreign  Exchanges,  1868. 
STORY,  JOSEPH:  Commentaries  on  the  Law  of  Bills  of  Exchange,  1853. 
SUMNER,  WILLIAM  G. :  A  History  of  Banking  in  the  United  States, 

1896. 

WHITE,  HORACE:  Money  and  Banking,  1896. 
WOODLOCK,  THOMAS  F. :  The  Anatomy  of  a  Railroad  Report,  1900. 


INDEX 


Abbreviations  used  on  the  tape,  136, 

137. 

Above  par.  149. 
Accepted,  226. 

Acton,   Thomas   C.,   Assistant    Treas- 
urer, 216. 
Adams,  Charles  F.,  on  the  Erie  wars, 

22,  23. 
Adams,  Henry,  on  the  nature  of  the 

stock-broker,  156. 
Advertising  by  brokers  in  New  York 

and  London,  270-271. 
American  Sugar  Ketineries  Co.,  149. 
Annunciators,  102. 
Application  for  quotation  in   Unlisted 

Department  of  the  Stock  Exchange, 

89  (illus.). 

Arbitrage  dealings,  18, 114,  115. 142. 
Arbitration    Committee   of    the    Stock 

Exchange,  112. 

Assay  Office,  15,  32,  221,  223,  225. 
established,  15. 
location  of,  223. 
Assessment,  stock,  79. 
Asset  currency,  253. 
Assistant  Treasurer,  his  standing,  216. 
men  who  have  filled  the  office,  216. 
Astor,  John    Jacob,  obliged   to   make 

his  own  investments,  170. 
Austin,  O.  P.,  on  United   States   as  a 

debtor  nation,  232. 

Backwardation,  151. 

Bagehot,  Walter,  on  value  of  time  in 
trade  operations,  133. 

Baker's  Hotel,  where  bankers  and  bro- 
kers of  the  "  House  of  Lords  "  met, 
26. 


Balance  of  trade,  theory  of  the,  230. 
Ballooned  stock,  148. 
Bank  agreement,  195, 197. 
Clearing-House,  32, 119,  179-181,  250, 

251. 

Clearing-House  methods,179, 180, 181. 
Clearing-House,  organization  of,  15. 
Clearing-IIouse,  record  of  one  day's 

transactions  of,  9. 
credits,  207. 
deposits,  208,  209. 
first,  1. 

first  National,  17. 
Franklin,  failure  of,  248. 
Gold  Exchange,  organized,  19. 
loans,  179,  181,  186,  192,  195,  198. 
Marine,  failure  of,  24. 
-note  circulation,  present  system  of, 

252. 

of  England,  214. 
reserve,  204,  205,  206,  207. 
statement,  issue  of,  200,  201. 
statement,  specimen  of  a,  202,  203. 
United   States,   6,  10,  11,  12,  218,  248, 

249. 

United  States,  first,  4. 
United   States,  second,  incorporation 

of,  7. 
Bankers'   convention   in   1812   and    in 

1838,  7,  12.  14. 

Bankers,  private,  177,  186,  258,  239. 
private,  business  of,  238. 
private,  magnitude  of  the  operations 

of,  239. 

Banking,  modern,  date  of,  2. 
power  of  the  world,  178. 
resources  of  the  United  States.  175. 
Banking-houses,  international.  241,  242. 
275 


27G 


THE  WORK   OP   WALL   STREET 


Hunks,  4,  6,  7,  10,  12,  24,  178,  179,  200- 
214,  217,  218. 

abolishment  of  special  charters  for, 
15. 

adoption  of  free  banking  law  for,  15. 

commercial,  177. 

national,  177,  178. 

New  York,  210,  211. 

number  of,  in  1827,  9. 

number  of,  in  Wall  Street  district, 
33. 

savings,  176, 177. 

State,  177. 

surplus  reserve  of,  204. 

suspend  specie  payments  in  1837,  in 

1857, 12, 16, 17. 
Bargains,  time,  2. 
Baring  Bros.  &  Co.  (see  also  panic), 

150. 

Barker,  Jacob,  insures  against  loss  of 
Government  deposits,  10. 

Eothschild  of  the  Street,  27. 

suspension  of,  248. 
Bear  movement,  62. 
Bears  and  bulls,  2,  49. 
Belmont,  August,  9,  28,  238. 
Bets  on  sure  things,  51. 
Biddle,  Nicholas,  26. 
Big  Four,  149. 
Bids  and  offers,  103. 
Bills  of  exchange,  1,  6,  226,  231. 
Black  Friday,  20,  21,  22,  249,  260. 
Blind  pools,  147,  245. 
Boer  War,  effect  of,  04. 
Bond  houses,  172. 

Bonds,  37,  58,  59,  78,  79,  81,  171,  172. 
217,  218,  219,  220.  ttfl. 

and  stocks,  listed,  81. 

and  stocks  unlisted,  81. 

collateral,  78. 

consolidated,  78. 

convertible,  78. 

coupon,  79. 

debenture,  77,  78. 

equipment,  78. 

income,  78. 

land-L'rant.  78. 

listed,  173. 


Bonds,  mortgage,  78. 

purchase  of,  217,  218,  219,  220. 

rates  of  interest,  173. 

registered,  78. 

United  States,  17, 172, 173. 

valuation  of,  58,  59,  172. 
Bookkeeping,  origin  of,  1. 
Boom  after  the  Revolutionary  War,  248. 

first,  2. 

McKinley,  25,  28,  47,  62,  64. 

of  1879,  24. 

of  1881,110. 
Bouch,  William  C.,  Assistant  Treasurer, 

216. 

Bourse,  Paris,  3. 
Boutwell,  Secretary,  order  to  sell  gold 

on  Black  Friday,  21. 
Bradish,   Luther,   Assistant  Treasurer, 

216. 
Bradstreet's  weekly  review  of  trade, 

264. 
Brokers,  bogus,  269,  271. 

commission,  168. 

legitimate  and  illegitimate,  270,  271. 

open  board  of,  organized,  18. 
Brokers'  pad,  101  (illus.). 
Brokers,  "  Koom  trader,"  94. 
Brokers,  specialist,  95. 
Broker's  statement,  167. 
Brokers,  "  two-dollar,"  94. 
Brown  Bros.  &  Co.,  established  in  New 

York,  9. 

Bryan,  W.  J.,  fear  of  his  election,  63. 
Bryce,   James,   on   difference   between 
American  and  English  stock-mar- 
kets, 113. 

on  power  of  Secretary  of  Treasury, 

215. 
Bucket-shopping,  168,  269. 

shops,  operation  of  the,  268,  269. 
Bull  market,  269. 

Bulls  and  bears,  2,  49,  145, 146, 147. 
Bulls,  most  people   are  such  by  tem- 
perament, 109. 

first  use  of  term,  2. 

origin  of  term,  151. 

Burnham,  Charles  L.,  Preface  and  140. 
Burr,  Aaron,  6. 


INDEX 


2TY 


Butler,  Charles  E.,  15. 

Buttcrfield,   Daniel,    Assistant    Treas- 
urer, 216. 

Buttonwood  tree  where  stock-market 
started,  152. 

Buyer's  clearance  ticket,  124  (illus.). 
or  seller's  options,  103. 

Cable  codes,  141. 

effect  on  commerce  of  the  world,  140. 

packer,  141. 

puts  market  on  common  basis,  141. 

work  of,  in  arbitrage  dealings,  114, 

115. 

Call-loans,  188, 189, 194. 
Call-money,  186. 

"  Calls,"  "  puts,"  and  "  spreads,"  105. 
Cammack,  Addison,  noted  bear,  28. 
Canda,  C.  J.,  Assistant  Treasurer,  216. 
Cannon,  Henry  W.,  25,  28. 
Cannon,  James  G.,  viii,  179. 
Capel  Court,  35. 
Capital,  7,  35,  36,  42. 

American,  invading  Europe  and  Asia, 
35,  36. 

banking,  7. 

Capitalists,  27,  28,  53,  93, 176,  257. 
Capitalization  of  new  combinations,  76. 
Carnegie,  Andrew,  capitalizes  his  for- 
tune in  one  operation,  41. 

on  college  men  in  business,  224. 

says  no  speculator  lives  life  creditable 

to  himself,  44. 
Carrier-pigeons  early  substitute  for  the 

cable,  141. 
Cash  holdings,  204,  205,  209. 

sales,  103. 
Cassatt,  A.  J.,  53. 
Center,  financial,  32. 
Central  Reserve  and  Eeserve  Cities,  178. 
Certificates  of  stock,  106,  107. 
Certification  of  stock,  115,  120,  182,  183, 

185,  186. 
Chamber   of    Commerce,   organization 

of,  5,  7, 17. 

'Change  Alley,  3,  8,  152. 
'Change  de  Paris,  3. 
Chart  showing  impressions  on  tape,  139. 


Checks,  origin  of,  1. 

Circulation,  emergency  as  safeguard  in 

panics,  253. 

Cisco,  John  J.,  Assistant  Treasurer,  216. 
City  Bank,  150. 
Clark,  Horace  F.,  27. 
Clearance,  stock,  120-130. 
Clearing-House,  first  issue  of  loan  cer- 
tificates, 17. 

Clearing-House,  Loan  Committee,  25. 
Clearing-Houses,  32,  119,  179,  181,250, 

251,  263. 

Cleveland,  Grover,  25,  223,  247. 
Clews,  Henry,  27,  43. 
Coal  strike  of  1902,  263. 
Coffee  Exchange,  33. 
Coifee-House,  old  Merchants',  9. 
Coins,  introduction  of,  1,  222. 
Coler,  Bird  S.,  159. 
Collaterals,  192,  196-198. 
Commerce,    foreign,     of    the    United 

States,  231. 
Commerce,  foreign,  carried  in  foreign 

vessels,  233. 

Commercial  banks,  177. 
Commission  Houses,  description  of,  161. 
Commissions,  first  rate  of,  5. 

rates  of,  18,  98. 

violation  of  commission  law,  98. 
Committee  on  Admissions  of  the  Stock 
Exchange,  95. 

of  the  Clearing-House,  132, 

on  insolvencies,  110,  111. 
Communities  of  interest,  150. 
Companies,  life-insurance,  173. 

organization  of,  76. 
Comparison  of  stocks,  105. 
Connor,  Washington  E.,  28,  94. 
Consol  certificate,  150. 
Consolidated  Stock  and  Petroleum  Ex- 
change, 19,  33,  49,  97. 
Contraction,  208. 
Cooke,  Jay.  23,  27. 
Coppering  a  tip,  147. 
Cordage,  collapse  in,  24. 
Corner  in  gold  (see  Black  Friday),  20, 
21,  261. 

Eric,  22,  23. 


2T8 


THE   WORK  OF   WALL  STREET 


Corner  in   Hannibal   and    St.   Joseph, 
97,  260. 

Harlem,  260. 

Lackawanua,  260. 

Michigan  Southern,  260. 

Morris  Canal,  10,  260. 

Northern  Pacific,  56,  63,  259. 

Northwestern,  260. 

Prairie  clu  Chien,  260. 
Corners,  20,  21,  147,  259,  260,  261. 

classification  of,  259. 
Corn  Exchange  incorporated,  15. 
Corporation  lawyer,  15,  71,  245. 
Corporations,  New  Jersey  laws  touch- 
ing, 79. 

Corre's  Hotel,  4. 
Cotton  Exchange,  33. 
Credit,  1,  17,  24,  43,  174,  175,  176,  207, 

208,  209,  213. 
Crises,  commercial,  247. 
Crop-moving  time,  2T1,  212,  213. 
Crop  reports,  266. 
Crops,  etfect  of  shortage,  263. 

Government  reports  of,  266. 

movement  of,  211,  213. 
Crump,  Arthur,  on  eft'ect  of  complete 
communications  between  markets, 
141. 

Curb  market,  3,  18,  34,  152,  155. 
Currency,  asset,  proposed,  253. 

elastic,  needed,  252. 

movement,  210. 

shipment  of,  210,  211,  212. 
Curtis,  George  William,  203. 
Custom-House,  28,  32,  216. 

Dawes,  Comptroller,  253. 
Deficits,  205,  206. 
Delivery  at  three  days,  103. 

cash,  103. 

of  stock,  105,  100,  107,  138. 

regular,  103. 

Depew,  Chauncey  M.,  233. 
Depositors,  savings-banks,  40. 
Deposits,  bank,  204,  208. 
Dewey,  Admiral,  35. 
Dill,  James  B.,  74,  75. 
District,  financial,  wealth  of,  32. 


Dividend,  passing  a,  149. 
Dividends,  37,  38,  77,  107,  108. 

cumulative  and  non-cumulative,  77. 
Dix,  John  A.,  Assistant  Treasurer,  216. 
Dodsworth,  William,  143,  233,  234. 
Doremus,  li.  P.,  viii,  132. 
Dos  Passes,  John  K.,  on  limitations  of 

Stock  Exchange,  92. 
Dow,  Charles  II.,  61,  143. 
Dow,  Jones  &  Co.,  143. 
Dows,  David,  27. 
Draper,  Simeon,  death  causes  a  flurry, 

27. 

Drew,  Daniel,  enters  Erie  directory,  22. 
great  speculative  director,  27. 
hides    money   to    increase   rates   for 

loans,  209. 
Drexel,  A.  J.,  predicted  panic  of  1893, 

250. 

Drexel  Building,  34. 
Duif,  John  K.,  97,  260. 
Dun,  K.  G.,  &  Co,   weekly  review  01 

trade,  264. 

Eames,  Francis  L.,  28, 112, 117,  118,  269. 
East  India  Company,  2. 
Edwards,  R.  L.,  on  need  of  stock-clear- 
ance system,  117. 
EmcKgency  circulation,  253,  254. 
Erie  Canal  establishes  New  York's  su- 
premacy, 8. 

Erie  wars,  account  of,  22,  23. 
Evarts,  William  M.,  15. 
Evolution  of  Wall  Street,  1-29. 
Exchange,  bills  of,  1,  0,  226,  231. 

London  Stock,  3. 

rate  of,  225. 
Expansion,  7,  8,  43,  208,  213,  214. 

of  the  money  market,  213,  214. 

of  the  stock-market,  7,  8. 
Export  of  specie,  210. 

Failures  in  the  Stock  Exchange,  110. 
Farmers'    Loan    and    Trust   Company, 

150. 

Field,  Cyrus  W..  19,  27. 
Finance,  high,  242. 
illegitimate,  80. 


INDEX 


279 


Financial  problem,  219. 

Financiers,  notable,  of  Wall  Street,  26, 
27,  28,  53,  93,  176,  257. 

Financing  of  National  banks,  179. 

Fink,  Albert,  gives  scientific  form  to 
railroad  reports,  266. 

Fire  of  1835,  12,  13. 

Fisk,  James,  21,  22,  27. 
colleague  of  Gould  in  gold  conspir- 
acy, 21. 

Flat  and  premium,  149. 

Flier,  146,  148. 

Flower,  K.  1'.,  death  of,  26,  64,  250. 
first  leader  in  McKinley  boom,  28. 
Governor  of  New  York,  159. 

Fluctuations  in  stocks,  50. 

Flurries  and  slumps,  147,  200. 

Folger,  Charles  J.,  Assistant  Treasurer, 
216. 

Forced  liquidation  explained,  49. 

Foreclosure  of  mortgage,  79. 

Foreign  commerce  of  the  United  States, 

231. 

exchange  and  the  balance  of  trade, 
224-237. 

Form  used  in  calling  loan,  189  (illus.). 

Franklin  Bank,  failure  of,  248. 

Fraunce's  Tavern,  5. 

Fulton,  Kobert,  8. 

Futures,  104. 

Gage,  Lyman  J.,  174,  218,  219. 
Garfield,  James  A.,  20-24,  223,  249. 
Gates,  John  W.,  44. 
General  view  of  Wall  Street,  30-36. 
Gentlemen's  agreement,  150. 
Gold  and  Stock  Company,  134. 

tmrs,  222. 

coin,  22-2,  225. 

conspiracy,  20,  21,  22. 

discovery  of,  in  California,  249. 

export  of,  231. 

import  of,  231. 

movement  of,  231,  284.  235. 

shipments,  228,  236. 

speculation  in,  18,  19. 

Standard  Law,  173.  223. 
Gould,  Edwin,  93. 


Gould,  F.  J.,  93. 

Gould,  George  J.,  28,  54,  93. 

system  of  railroads,  53. 
Gould,  Howard,  93. 
Gould,  Jay,  as  a  manipulator,  156. 

builder  and  wrecker  of  values,  27. 

in  the  Erie  wars,  22,  23. 

in  the  gold  conspiracy,  21. 

partner  of  H.  N.  Smith,  28. 
Government  money,  216,  217,  218. 

of  the  Stock  Exchange,  111,  112. 

policy,  253,  254. 
Granbery,  W.  II.,  132. 
Grant,  President,  breaks  corner  in  gold, 
21. 

failure  of,  24. 

on  fictitiousness  of  prosperity  in  1869, 

23. 
Green,  Norvin,  on  use  of  the  telegraph, 

140. 

Guizot,  152. 
Gunning,  146,  148. 

Hamilton,   Alexander,    buys  bonds   to 
relieve  money  market,  248. 

draws  up  plan  of  Bank  of  New  York,  4. 

gives  relief  to  Street,  30. 

house  on  Wall  Street,  5. 

in  Wall  Street,  26. 
Hart,  Bernard,  26. 
Harlem,  corner  in,  10. 
Harriman,  E.  II.,  28,  93. 

system  of  railroads,  53. 
Harrison,  President,  223. 
Hatch,  A.  S.,  24, 158. 
Hay,   Secretary,   on   United   States    as 
debtor  nation,  36,  231. 

Hazard,  Charles,  132. 
Heath,  William,  28. 
Hedged,  146. 
Ilendrix,  Joseph  C.,  on  need  of  bank  of 

ultimate  reserve,  218. 
Hepburn,  A.  B.,  on  situation  in  1893, 

252. 

Herald,   New   York,   gives   account   of 
stock  market  in  1835,  10. 

on  Ohio  Life  failure  in  1857,  16. 

report  of  market  in  1837,  10. 


280 


THE  WORK  OP  WALL  STREET 


Hill,  James  J.,  system  of  railroads,  53. 
Hillhouse,  Thomas,  Assistant  Treasurer, 

216. 

Holding  companies,  75. 
Hone,  Philip,  impressions  of  Street  in 

1842, 13, 14. 
losses  by  United  States  Bank  failure, 

12. 
Hough  ton,  J.,  his  early  business  paper, 

144. 

House  of  Lords  in  Wall  Street,  26. 
Hudson  Bay  Company,  2. 

Illustration  of  stock  clearance,  123, 128. 
Import  of  specie,  210. 
Incorporation  of  companies,  73,  74. 
Insiders,  51,  69. 
Insurance  policies,  life,  40. 

shares,  6. 

Interest,  1,  58,  172, 173,  180, 188. 
International  balances,  232,  233,  234. 

banking  houses,  241. 

payments,  228. 

Interstate  Commerce  report,  173. 
Investments,  40,  41,  42,  170, 171. 
Investors'  risks,  170. 
Ives,  Brayton,  112, 158. 

Jackson,  Andrew,  war  on  U.  S.  Bank,  12. 
Jenks,  J.  F.,  defines  meaning  of  a  trust, 

74. 

Jerome,  Leonard,  27. 
Jevons  on  foreign  exchange,  227. 
Jordan,  Conrad  N.,  Assistant  Treasurer, 

216. 

Kaffir  stocks,  113. 

Keene,  James  K.,  as  a  manipulator  of 

stocks,  258. 

Keppler,  Rudolph,  112. 
King,  Edward,  112. 
Kite-flying,  147. 
Knox,  John   J.,  urges  stock-clearance 

system,  117. 

Lambs.  44.  145,  148. 

Language  of  Wall  Street,  145-151. 

Law,  John,  3,  152. 


Law,  New  York  Free  Banking,  15. 
Laws,  New  Jersey,  touching  corpora- 
tions, 73,  74. 
Leased  wires,  140. 
Legal  reserve  of  a  bank,  204. 
Legal-Tender  Act  passed,  17. 
Legal  tenders,  17,  204,  205,  209. 
License,  brokers',  2. 
Listing  of  securities,  81-86. 
Little,  Jacob,  27. 
Loaded,  146. 
Loan  certificates,  180,  250-253. 

envelope,  188,  189. 

Loans,  41,  108,  184,  185,  204,  208,  211, 
229. 

expansion  of,  208. 

foreign,  229. 

outstanding,  204. 

sterling,  236,  239. 

sterling,  making  of,  239. 

stock,  108,  109. 

time,  198. 

Western,  211. 
Lombard  Street,  35. 

London  Stock  Exchange,  3,  8, 113, 114, 
115. 

market,  143,  152. 

introduction  of  Yankee  rails  into,  9. 
Long  of  the  market,  49. 
Louisville  and  Nashville  deal,  44. 

Macaulay,  Thomas  B.,  2,  39,  144. 
Macleod  on  credits,  174. 
Mackay,  Donald,  128,  112. 
Manipulation  of  stocks,  41,  57,  59,  61. 

209,  255,  257,  258. 

Manipulations  and  corners,  255-261. 
Map  of  Wall  Street  district,  31. 
Margins,  14C,  148,  166,  107. 
Maritime  Exchange,  32. 
Market  letters,  169. 

report,  143. 

rigged,  147. 

Marsten,  William  II.,  27. 
Marvin,  Charles  K.,  112. 
Matched  orders,  104. 
McConnell.  Matthew,  first  president  or 
Philadelphia  Exchange,  9. 


INDEX 


281 


McCue,  Alexander,  Assistant  Treasurer, 

216. 

McGoveru,  James,  viii. 
McKinley,  President,  25, 26, 77, 141, 251. 
appoints  industrial  commission,  77. 
boom,  25,  62,  64. 
Medbury,  James  K.,  on  the  use  of  the 

cable  in  1866,  141. 

Membership  in  the  Exchange,  96,  97. 
Merchants'  Association,  173. 

Exchange,  old,  32. 
Mileage,  railroad,  9,  85. 
Mississippi  Company.  29, 152. 
Mitchell,  Alexander,  27. 
Money,  1,  175,  176,  181,  210,  211,  212. 
brokers,  186. 
hoarding  of,  175. 
market,  181,  182. 
and  stock  market,  point  of  contact 

between,  181,182. 
movements  of,  210,  211,  212. 
paper,  1. 
payment  of,  210. 
power,  concentration  of,  214. 
transfer  of,  221. 

Morgan,  J.  Pierpont,  achievement  in 
organization  of  Steel  Corporation, 
239. 

conference  at,  242. 

dominating  force   in  Steel   Corpora- 
tion, 54. 

foreign  alliances,  238. 
greatest    personal     product    of    the 

Street,  240. 

immense  operations,  239. 
not  member  of  Exchange,  94. 
nature  of  transactions,  240. 
office  of  his  firm,  34. 
only  dealer  in  billions,  23. 
speaks   of  ten   million   dollars    as   a 

small  matter,  30. 
system  of  railroads,  53. 
testimony  in  Northern  Securities  case. 

240,  -241. 

Morris  Canal  shares  offered  to  pub- 
lic. S. 

Morse,  Anthony  W..  15.  27. 
Movement  of  gold,  234,  -235. 


Nash,  W.  A.,  25. 
National  Banking  Act,  17. 

banks,  177, 178, 183,  184. 
New  Street,  14. 

New  York  Central  Kailroad,  30,  60. 
New  York  News  Bureau,  143. 

Quotation  Company,  134,  138. 

Stock  Exchange  Clearing-House,  116- 

132. 

Northern  Pacific  Eailroad,  20,  22. 
Northern  Securities  Company,  30,  73, 

75,  240. 

Norton,  Eliot,  161. 
Note  circulation,  177. 

Office  buildings,  34. 

Ohio  Life  and  Trust  Co.,  16. 

Open  Board  of  Brokers,  18. 

Operators,  stock,  50,  51. 

Options,  71,  103, 104. 

Order  blank,  164. 

Ouvard,  corners  in  paper  and  coffee,  261. 

Overcapitalization,  76. 

Overcertification  of   checks,   116,  183, 

184,  185. 

Overend,  Gurney  &  Co.,  24,  249. 
Overspeculation,  16,  45,  246. 
in  1901,  45. 


Panic,  first  important,  7. 
of  1791,  248. 
of  1812-14,  248. 
of  1818,  248. 
of  1826,  248. 
of  1837, 10, 12,  243,  249. 
of  1839,  249. 
of  1841,  249. 
of  1848,  249. 
of  1857,  16,  249. 
of  Sept.  24,  1869  (Black  Friday 

21,  22,  249. 
of  1573.  23.  110,  249. 
of  1SS4.  24,  249. 

of  1890  f  Baring).  24.  "62.  249,  250. 
of  1S93,  24,   25.  47,  110,  118,  247 

252. 

of  December,  1895  ( Venezuelan  ' 
of  May  9,  1901,  45,  110,  118,  242, 


282 


THE   WORK   OP    WALL   STREET 


Punic,  war,  249. 

world's  first  great,  3. 
Panics,  10,  16,  23,  24,  25,  62,  118,  246- 
254. 

causes  of,  246. 

commercial,  247. 

recapitulation  of,  253,  254. 
Par,  149. 
Paris  Bourse,  3. 
Passing  a  dividend,  149. 
Pennsylvania  Railroad,  53. 
Perkins,  E.  H.,  25. 
Pests  of  Wall  Street,  268-271. 
Petroleum  Exchange,  97. 
Philadelphia  Stock  Exchange,  3,  9,  117. 
Plungers,  44, 145. 
Point,  146,  147. 
Policies,  life-insurance,  40. 
Pool,  145,  147. 
Pools,  manipulation  by,  257,  258. 

selling  by,  48. 

Potter,  Bishop,  on  immorality  of  artifi- 
cially depressing  values,  256. 

says  corporations  should  be  com- 
pelled to  make  monthly  reports, 
90. 

Preferred  stock,  77. 
Premiums,  149, 150,  172,  173. 
Presidents  of  the  Stock  Exchange,  112. 
Prices,   depreciation   in,   from    1837    to 
1841,  12,  13. 

influences  that  make  them,  59. 

phenomena  of  sudden  changes,  56. 

wide  fluctuations  in,  55. 
Prime,  Nathaniel,  27. 
Private  bankers  and  underwriting  syn- 
dicates, 238-245. 
Privileges,  105. 
Produce  Exchange,  32,  139. 
Professionals,  145,  140. 
Profit  in  certificating  checks,  185. 
Promoters,  70,71,  171. 
Public  selling,  48. 
Puts  and  calls,  2. 
"Puts,"   "calls."    and   "spreads,"   105, 

148. 

Pyramiding,  147,  14S. 
Pyramid  of  credit,  207,  208. 


Quotation  Company,  New  York,  138. 

list,  140. 
Quotations  for  stocks,  55. 

instantaneous,  114. 

Raid,  49, 166. 

Railroad   reports,   importance  of,   264, 
265. 

train,  first  transcontinental,  20. 
Railroads,  9,  10,  12,  20,  22,  23,  24,  45,  52, 
53,  63,  149,  239,  260,  264,  265. 

comparison  of  reports  of,  265. 

Gould  group  of,  53. 

Grangers,  52. 

Morgan  group  of,  53. 

Morgan-Hill  group  of,  53. 

Pennsylvania  group  of,  53. 

Reading,  group  of,  22. 

the  coalers,  52. 

transcontinental,  52. 

trunk-line  group  of,  52. 

Vanderbilt  group  of,  52. 
Real  Estate  Exchange  Salesroom,  33. 
Record  of  New  York  Quotation  Com- 
pany, 138. 
Regular,  103. 
Rehypothecation,  160. 
Rhodes,  Cecil,  death  of,  141. 
Rigg,  145,  147. 
Right  of  redemption,  160. 
Rights,  value  of,  149. 
Roberts,    E.    II.,   Assistant   Treasurer, 

216. 

Robinson,  William,  132. 
Rockefeller,  John  D.,  28,  93. 
Rockefeller,  William,  28,  93. 
Rock   Island,  device  for  keeping  con- 
trol of,  69. 

Rodewakl,  F.  L.,  132. 
Rogers,  II.  II.,  28. 

Room  traders  as  skilled  workmen,  51. 
Roosevelt,  President,  urges"  publicity." 

90. 

Rothschild,  Nathan   M.,  death   of.  re- 
ported by  pigeons,  141. 
Rothschilds  appoint  a  representative  in 
New  York,  9. 

power  of,  238. 


INDEX 


283 


Sage,  Eussell,  27,  93, 186. 

Sales,  11,  19,  46-49, 55, 103-106, 110, 148. 

at  three  days,  103. 

cash,  103. 

official,  in  1868, 19  ;  in  1901,  19. 

on  call,  19. 

over  the  counter,  110. 
Savings-banks,  40,  176,  177. 
Say,  J.  B.,  on  misconception  as  to  bal- 
ance of  trade,  230. 
Scalper,  145,  146. 
Schiff,  Jacob  II.,  28. 
Seats  in  the  Stock  Exchange,  93-C6. 
Secretary  of  Treasury's  power  in  Wall 

Street,  215,  216. 
Securities  that  make  good  collateral  for 

loans,  192. 
Seney,  George  I.,  suspension  of,  24. 

promoted  Nickel  Plate,  27. 
Seventh  National  Bank  failure,  183. 
Shaw,   Secretary,   measures   to  relieve 

money  market,  220. 
Shearing  the  lambs,  148. 
Sherer,  William,  viii. 
Sherman  Silver-Purchase  Bill,  250. 
Short,  49,  108,  109,  146,  148. 
Simmons,  J.  Edward,  24,  28,  112,  158, 

251. 

Slump,  145,  147. 
Smith,  Henry  N.,  28. 
Smith,  James  D.,  158. 
Smith,  William  Alexander,  112. 
South  Sea  Company,  3,  29. 
Southern  Railway,  heavy  sales  on  April 

15, 1902. 
Specialists,  95. 

Specie  payments,  resumption  of,  62. 
Specimen  of  a  call-loan,  189-196  (illus.). 
Speculation,  2,  3,  18,  41,  42,  47,  48,  50. 
51,  59,  61,  94,  118. 

during  civil  war,  18. 

stock,  early  mania  for,  3. 
Speculators,  inside.  51. 

professional,  50,  51,  61,  94,  109. 
Speyer,  Albert,  21. 
Spooner,  Senator,  270. 
Squeezed,  146. 
Standard  Oil  Company,  33,  74.  88,  153. 


State  banks,  177. 

Statement  of  stock  to  deliver,  127  (illus.). 

of  the  associated  banks  of  New  York 

city,  202,  203. 

Statistics  of  stocks  for  1901,  45,  46. 
Stebbins,  H.  G.,  112. 
Stedman,  E.  C.,  22, 159. 
Steel   Corporation,   United   States,  54, 

73,  239,  243. 
Stewart,  John  A.,  216. 
Stillman,  James,  28. 
Stock  and  money  markets,  point  of  con- 
tact between,  181, 182. 

assessment,  79. 
Stock,  ballooned,  146, 148. 

Board  at  outbreak  of  civil  war,  17, 18. 

brokers  and  customers,  159, 160. 

brokers'  commissions,  166. 

brokers,  privileges  of,  167. 

brokers,  profit  of,  110. 

certificates,  2,  69,  70,  72,  106,  107. 

chart,  65. 

clearance,  illustration  of,  123-128. 

Clearing-House  Committee,  132 . 

Clearing-House  draft,  126. 

Clearing-House,  establishment  of,  19, 
116,  118. 

Clearing-House  expansion,  120. 

Clearing-IIouse,  record  of  day's  trans- 
actions, 119. 

clearing  system,  first,  116. 

common,  77,  78. 

company,  formation  of  a,  70,  71,  72. 

company,  London,  114. 

control  of,  69. 

cornered,  146, 147. 

delivery  of,  105,  106,  107,  108. 

dividends,  77,  107,  108. 
Stock   Exchange,   3,   7,    8,    19,   23,  32, 
45,  51,  84,  91-115,  117,  134,  152. 

advantage  of  membership  in  the,  94. 

application  for  membership  in  the,  95. 

application  for  quotation  in  Unlisted 
Department  of  the,  89. 

arbitrage  dealings  with  the,  114,  115. 

Arbitration  Committee  of  the,  112. 

average  attendance  on  floor  of  the,  95. 

Board  Room  of  the,  99. 


284 


THE  WORK  OF   WALL  STREET 


Stock  Exchange  brokers'  pad,  101. 

bulk  of  transaction  in  $10,000  blocks, 
103. 

business  hours  of  the,  98, 100, 101,  111. 

Chairman  of  the,  98,  99. 

Clearing-Housc,  115-132. 

Committee  on  Admissions  of  the,  95. 

earliest  beginning  of,  4,  5. 

expulsion  from,  97. 

failures  in  the,  110,  111. 

Governing  Committee  of,  84,  97,  111. 

government  of,  92,  111,  112. 

London,  113-115. 

membership  in,  92,  97. 

method  of  calling  members  of,  102. 

national  institution,  92,  93. 

new  building  of  the,  112,  113. 

New  York,  compared   with   that   of 
London,  113-115. 

officers  of  the,  111,  112. 

Philadelphia,  9,  89,  117. 

price  of  seats  in,  96. 

quotations,  134. 

removal  of,  9. 

revision  of,  8. 

Room  traders  of,  94. 

rules  of,  23,  70  ;  83-86. 

ruling  for  registration  of  shares,  23. 

specialists,  95. 

two-dollar  brokers  of  the,  94. 

Unlisted  Department  of,  87. 

watering,  76. 

workers  of  the,  94. 
Stock  experts,  51. 

indicator,  adoption  of,  19. 

jobber,  2,  114. 

jobbing,  2,  3,  39,  151. 

jobbing,  acts  of  Parliament  against,  3. 

List  Committee,  84,  86. 
Stock-list,  main  divisions  of,  52. 
Stock  loans,  103,  109. 
Stock-market,  2,  4,  6,  8,  37-54,  152,  181, 
182. 

average  steady  attendance  of,  4«. 

dimensions  of,  in  1S01,  0. 

English,  beginning  of,  2,  38,39. 

divisions  of,  49,  50. 

expansion  of,  7,  8. 


Stock-market,  London,  39, 152. 

report,  London,  first,  143. 

terms  used  in  the,  49. 
Stock  pegging,  146, 147. 

pool,  147. 

promoter,  70,  71. 

pyramided,  146. 

railroad,  first,  put  on  Stock  Exchange 
list,  9. 

sales;  see  Sales. 

speculations,  2,  3,  18,  47,  48,  50,  51,  59, 
61,  63-65,  94. 

transfer  of,  106, 107. 

values,  59,  60,  61,  63,  64. 
Stocks  and  bonds,  listed,  81. 

unlisted,  82. 
Stocks,  common,  37. 

comparison  of,  105. 

covered,  49. 

depreciation  of,  in  1841,  12. 

fluctuations  in,  56. 

indications  of  activity  in,  46,  47. 

influences  governing  the  price  of,  59. 

nicknames  for,  136. 

preferred,  37,  77,  78. 

quotations  for,  55. 

railroad,  47,  48. 

held  by  limited  number  of  capitalists, 
53. 

rates  of  dividend,  60. 

report  of,  in  1835,  10,  11,  12. 

short  selling  of,  109. 

transcontinental,  20. 

unlisted,  54,  87. 

Wall  Street  names  for,  149. 

watering,  76,  77,  93. 
Stoker,  George,  the  cable  packer,  141. 
Stop  order,  146,  166. 
Straddling  the  market,  148. 
Substitutions,  192. 

Subtreasury  and  Assay  Office,  215-223. 
Subtreasury     first      opened     in     Wall 
Street,  15,  3-2,  179. 

charges,  221. 

establishment  of  the,  216,  217. 
statement,  212. 
Sumner,  W.  G..  247. 
Surplus  reserve  of  banks,  204,  205. 


INDEX 


285 


Sympathy,  effect  of,  in  speculation,  54. 
Syndicates,  72,  242,  243,  244,  245,  255, 

257. 
underwriting,  71,  72,  242-245. 

Table     of    dividends    of   well-known 

stocks  for  1901,  58. 
Tappen,  F.  D.,  25,  28,  218,  271. 
Taylor,  II.  A.,  outlines  Treasury  policy 

regarding  bond  purchases,  219. 
Telegraph,  value  to  Wall  Street,  140. 
Terras  of  the  stock-market,  145, 146. 
The  allotment  sheet  of  the  Clearing- 
House,  129  (illus.). 

annunciator,  102. 

Bank  Statement,  200-214. 

Big  Four,  149. 

broker  and  his  office,  156-169. 

cable,  19,  133, 140, 141,  142,  144,  239, 
243. 

clearance  sheet,  125  (illus.). 

Clearing-House  draft,  120. 

Consol  certificate,  150  (illus.). 

curb  broker,  153, 154, 155. 

curb  market,  3,  18,  152-155. 

gentlemen's  agreement,  150. 

Investment  Business,  169-173. 

Money  Market,  174-199. 

"  Monon,"  149. 

news  slips,  133,  143. 

New  York  Stock  Exchange,  91-115. 

'•  Nickel  Plate,"  149. 

Roman  collegium,  2. 

State  of  Trade,  262-267. 

stock  company,  67-80. 

stock  indicator,  133,  134,  138,  139. 

stock-market,  37-34. 

"  tape  "  as  it  comes  from  the  ticker, 
133-137  (illus.). 

telegraph,  15,  19,  133,  140. 

telephone,  133,  142. 

telephone,    business    transacted    by, 
141,  142. 

theory  of  values  and  prices,  61. 

Treasury,  251,  252. 

Unlisted  Department,  87-90. 
Threadneedle  Street,  35. 
Throgmorton  Street,  35. 


Ticker  company,  controversy  with  the, 

134. 

Time  bargains,  2,  12. 
Time-loans,  198. 
Tips,  64,  146,  147. 
Tontine    Coffee-House,    establishment 

of,  5. 

Tools  of  Wall  Street,  133-144. 
Trade  and  the  stock-market,  262,  263. 

barometers  of,  263. 
Transfer  of  money,  221. 
Trans-Missouri  decision,  25. 
Travers,  William  E.,  27. 
Triangular  transaction,  234-236. 
Trinity  Church,  5, 13,  28. 
Trusts,  74,  75, 177,  239. 

Under  the  rule,  105,  146. 
Underwriting,  new  issues  of  securities, 
242. 

risks  of,  242,  244,  245. 
Union  Pacific,  losses  of,  in  1901,  46. 
United  States  Bank,  10, 12,  218,248,249. 

first,  4. 

second,  incorporation  of,  7,  11,  13. 
United  States  bonds,  172,  173. 

Steel  Corporation,  54, 73, 154,  239,243. 
Unlisted  Department  of  the  Stock  Ex- 
change, 87. 
Usury,  1. 

Values  and  prices,  55-66. 
Vanderbilt,  Commodore,  22,  27. 
Vanderbilt,  W.  II.,  death  of,  27. 
Vanderbilt,  W.  K.,  28. 

system  of  railroads,  53. 
Van  Dyck,  II.  II..  216. 
Vermilye.  W.  E..  28,  112. 
Villard,  Henry,  drives  the  golden  spike, 


Waldorf-Astoria   Hotel,  where  brokers 

congregate,  30. 
Wall  Street,  an  American  Monte  Carlo, 

40. 

business  scope  of.  35. 
events  of  supreme  importance  to,  9. 
glossaries,  145. 


286 


THE   WORK  OF  WALL  STREET 


Wall  Street  in  1792. 
new  birth  of,  14. 
notable  men  of,  2t>,  27,  28,  53,  93, 176, 

257. 

origin  of  name,  5. 
securities,  divisions  and  subdivisions 

of,  75. 

War  with  Spain,  25. 
Ward,  John,  27,  112,  141. 
Wash  sales,  104,  148. 
Wealth  of  the  United  States,  81. 
Webster,  Daniel,  on  value  of  credit,  174. 
Western  Union  Telegraph,  33. 
"  What  constitutes  the  value  of  a  bond," 

58,  59. 

"  What  is,  and  why  is  there,  a  stock- 
market,"  37,  38. 
White,  Horace,  157, 158. 


White,  S.  V.,  broker  and  lawyer,  158, 

159. 
manipulator  of  Lackawanna,  28. 

Williams,  G.  G.,  25. 

Williams,  Justice,  on    law   governing 
margins,  199. 

Windsor  Hotel,  32. 

Wiped  out,  146. 

Withholding  information  from  the  pub- 
lic, 89,  90. 

Woerishoffer,  Charles  F.,  toned  bear,  28. 

Woodlock,  Thomas  F.,  viii,  266. 

Woodward,  W.  S.,  27. 

Yankee  rails,  9, 113. 
Yankee  rails,  first  traded  in  in  Lon- 
don, 9. 
Young,  John,  216. 


(3) 


THE    END 


UCLA-GSM  Library 

HG4572P88 


L  005  038  967  5 


001317910    6 


